Donaldson: Holding Strong And Looking To Set New Highs

| About: Donaldson Co (DCI)

The stock of filtration system maker Donaldson Company, Inc. (NYSE:DCI) is currently trading at a robust $37.89 per share after reporting its third quarter fiscal 2013 financial results on May 17. At present, shares of DCI are well within striking distance of the company's 52-week high of $39.36 per share that was reached during intra-day trading on May 21. The current daily trading range actually encompasses the 52-week high, which is a particularly bullish condition in light of the relatively discouraging announcement of the company's third quarter fiscal 2013 earnings on May 17. In fact, the close on May 22 of $37.89 per share - after a trading session in which the S&P 500 Index lost 13.81 points - translates into DCI shares only being 3.8 percent from their 52-week high. Clearly, the stock of Donaldson Company, Inc. is experiencing a breakout to new highs in 2013. Shares of DCI are currently up in a convincing way for the year, with a 15 percent gain from the stock's closing price of $32.84 per share on December 31, 2012. By comparison, the benchmark S&P 500 Index has gained 18 percent year-to-date in 2013, which means that DCI shares could easily exceed this performance with a less than four percent pop to new 52-week highs.

When assessing an optimal entry point to begin adding the stock of Donaldson Company to an equities portfolio, several key factors should be taken into consideration. A closer look at Donaldson Company's most recent financial results from the third quarter of fiscal 2013, an analysis of the technical chart for DCI shares, and the sentiment of industry analysts providing coverage of the company's stock will give investors greater insight into the potential for continued performance in the coming quarter.

On May 17, Donaldson Company, Inc. released its third quarter fiscal 2013 financial results, which revealed that the company generated 46 cents earnings per diluted share on revenue of $619 million for the three month period that ended on April 30. These figures were considerably lower than the average consensus earnings and revenue estimates of the industry analysts that provide coverage of the company's stock. Prior to the May 17 quarterly financial report, the consensus expectations of analysts had Donaldson Company poised to earn 48 cents per share with revenue of $658.6 million for Q3 fiscal 2013. The EPS figures actually represented no change year-over-year, with Donaldson Company earning the same 46 cents in Q3 fiscal 2012. On the revenue side, Donaldson Company actually experienced a 4 percent decline year-over-year from the $647 million top-line figure the company posted in the same Q3 of last year. Similarly, net earnings also dropped $1 million, from $71 million to $70 million, which represents a 2 percent decline year-over-year compared to Q3 fiscal 2012.

The important fact regarding DCI management's ability to retain the same 46 cents EPS results from the year ago period is found in the company's ability to control costs. Donaldson Company's chief executive officer Bill Cook cited the challenging global economic environment as one of the reasons for the drop in top-line revenue during the quarter. Similarly, Cook pointed out the encouraging development that DCI achieved a record operating margin of 15.9 percent in Q3 fiscal 2013, which helps explain how the company kept its quarterly EPS in line with the year-over-year comparable figure. Significantly, Donaldson Company's management team was able to decrease operating expenses by nearly $7 million from Q3 fiscal 2012. In the year ago comparable quarter, Donaldson Company reported operating expenses of $129.8 million, which was dramatically reduced to $122.9 million in Q3 fiscal 2013. The company also noted that foreign currency conversion impacted its financial results by attributing $10 million in decreased sales and $0.7 million in decreased net earnings for the quarter. This development is important for investors to note because the cumulative impact of foreign currencies is responsible for $28.6 million in decreased sales and a $1.9 million decrease in net earnings year-to-date in Donaldson Company's fiscal 2013 accounting period.

For the company's next financial reporting period covering full-year fiscal 2013, Donaldson Company management issued forward guidance of an estimated EPS range of $1.57 to $1.65 per share. This EPS range represents a substantial decrease from DCI's original fiscal 2013 guidance of $1.61 to $1.81 per share and also falls well below the average consensus analyst estimate of $1.69 per share for the full-year earnings. The company also lowered its fiscal 2013 revenue guidance to a range of $2.4 billion to $2.45 billion, which represents a 2 to 4 percent lower estimate than original guidance - and, coincidentally, fiscal 2012 full-year revenue of $2.5 billion. Prior to the company's May 17 announcement, industry analysts had been expecting a consensus estimate of $2.51 billion for Donaldson Company's full-year fiscal 2013 revenue. The key factors for DCI's Q3 fiscal 2013 financial report and updated guidance for its full-year results are that the company understands the challenges it faces in the current economic climate and is taking appropriate managerial action to execute a strategy that is defending its investors by focusing on the retention of EPS. The cost cutting initiatives seem to be reaping some rewards and chief executive Bill Cook is not sugar-coating the challenges Donaldson Company is confronting in the global economy. This candor, combined with the lowered guidance, gives investors a clear picture of where the company is headed in the coming quarter.

Despite all the diminished expectations regarding its Q3 fiscal 2013 financial results, the stock's chart shows shares of DCI are continuing their upward ascent to new highs for the year. The market reaction to the Q3 earnings release on May 17 serves as a particularly informative piece of information regarding the stock's prospects for new 52-week highs. After the Q3 fiscal 2013 earnings announcement came out before the market opened on May 17, the stock initially opened lower for the trading session before enduring a tremendous whipsaw price action that saw DCI shares close the day essentially unchanged at $38.18 per share, which was up a full 8 cents from the prior day's close. Notably, DCI shares reached an intra-day low of $36.35 per share and a high for the trading session of $39.30 per share, which was actually a new 52-week high for the stock. The $36.35 low on May 17 corresponded to a strong test of DCI's 50-day exponential moving average that was at $36.41 on that particular trading day. These are critical factors for investors to consider, as it is extremely rare for a stock to challenge its 50-day EMA, which, by implication, would infer simultaneous tests of its 8-day and 20-day EMAs as well, and its 52-week high within the same trading session. The total daily volatility for DCI on May 17 was over 8 percent, which is made even more substantial because of the dual tests of its 50-day EMA and setting a new 52-week high during the same trading session.

The strong performance of DCI shares in the wake of its relatively lackluster earnings announcement on May 17 makes this stock a buy at its current level of around $38 per share. Analysts have a consensus hold rating on DCI stock with an average price target of $36.83 per share. With such tepid sentiment toward DCI, the stock still continues to make new 52-week highs, which translates into positive developments when the analyst community begins to issue upgrades and boost price targets. Investors looking to add Donaldson Company to their stock portfolios have a great opportunity with the stock trading at its present levels.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.