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Donaldson Co Inc. (NYSE:DCI) recently reported its preliminary financial results based on which CapitalCube provides a unique peer-based analysis of the company. Our analysis is based on the company's performance over the last twelve months (unless stated otherwise).

Donaldson Co Inc.'s analysis versus peers uses the following peer-set: Pall Corp. (NYSE:PLL), CLARCOR Inc. (NYSE:CLC), Hangzhou Hangyang Co. Ltd. (002430), Entegris Inc. (NASDAQ:ENTG), Fujian Longking Co. Ltd. (600388) and Ceco Environmental Corp. (NASDAQ:CECE). The table below shows the preliminary results along with the recent trend for revenues, net income and returns.

Quarterly (USD million)2012-10-312012-07-312012-04-302012-01-312011-10-31
Revenues588.9656.8647.2580.9608.3
Revenue Growth %(10.3)1.511.4(4.5)(2.7)
Net Income54.171.070.953.868.6
Net Income Growth %(23.8)0.031.8(21.5)4.2
Net Margin %9.210.811.09.311.3
ROE % (Annualized)23.229.829.723.930.1
ROA % (Annualized)12.616.316.512.615.8

Valuation Drivers

Donaldson Co Inc.'s current Price/Book of 5.2 is about median in its peer group. Donaldson Co Inc.'s operating performance is higher than the median of its chosen peers (ROE of 27.1% compared to the peer median ROE of 17.0%), but the market does not seem to expect higher growth relative to peers (PE of 20.5 compared to peer median of 17.7), but simply to maintain its relatively high rates of return.

The company's median net profit margins of 10.1% and relative asset efficiency (asset turns of 1.4x compared to peer median of 1.0x) give it some operating leverage. Donaldson Co Inc.'s net margin has declined 0.5 percentage points from last year's high, but remains above its four-year average net margin of 8.8.

Economic Moat

Donaldson Co Inc.'s revenues have changed in-line with its peers (year-on-year change in revenues is 8.7%), but its earnings have lagged (annual reported earnings have changed by 17.3% compared to the peer median of 29.1%), implying that the company has less control over its costs relative to its peers. Donaldson Co Inc. is currently converting every 1% of change in revenue into 2.0% change in annual reported earnings.

Donaldson Co Inc.'s return on assets is above its peer median, both in the current period (14.4% vs. peer median 10.8%), and also over the past five years (12.4% vs. peer median 7.1%). This performance suggests that the company's relatively high operating returns are sustainable.

The company's gross margin of 37.1% is around peer median, suggesting that Donaldson Co Inc.'s operations do not benefit from any differentiating pricing advantage. In addition, Donaldson Co Inc.'s pre-tax margin of 14.4% is also around the peer median, suggesting no operating cost advantage relative to peers.

Growth And Investment Strategy

While Donaldson Co Inc.'s revenues have grown faster than the peer median (10.1% vs. 6.3%, respectively for the past three years), the market gives the stock an about peer median PE ratio of 20.5. This suggests that the market has some questions about the company's long-term strategy.

Donaldson Co Inc.'s annualized rate of change in capital of 7.4% over the past three years is around the same as its peer median of 6.8%. This investment has generated a better than peer median return on capital of 19.4% averaged over the same three years. The greater than peer median rate of return suggest that the company may be under investing in growth.

Earnings Quality

Donaldson Co Inc.'s reported net income margin for the last twelve months is around the peer median (10.1% vs. peer median of 10.1%). However, the company has also recorded a relatively low level of accruals (0.7% vs. peer median of 3.3%), which suggests possible overstatement of its reported net income.

Donaldson Co Inc.'s accruals over the last twelve months are around zero. However, this modestly positive level is also less than the peer median, which suggests some amount of building of reserves.

Trend Charts

Company Profile

Donaldson Co Inc. is a manufacturer of filtration systems and replacement parts. Its product mix includes air and liquid filtration systems and exhaust and emission control products. The company operates through two segments: Engine Products and Industrial Products. The Engine Products segment consists of air filtration systems, exhaust and emissions systems, liquid filtration systems, and replacement filters. This segment sells its products to original equipment manufacturers in the construction, mining, agriculture, aerospace, defense, and truck markets and to OEM dealer networks, independent distributors, private label accounts, and large equipment fleets. The Industrial Products segment consist of dust, fume, and mist collectors, compressed air purification systems, air filtration systems for gas turbines, PTFE membrane-based products, and specialized air filtration systems for applications including computer hard disk drives. This segment sells its products to various industrial end-users, OEMs of gas-fired turbines and OEMs and end-users requiring clean air. Donaldson was founded by Frank Donaldson in 1915 and is headquartered in Minneapolis, MN.

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Source: Earnings Analysis: Donaldson Co Inc.