After looking at results (pdf) from Clarcor Inc. (NYSE:CLC) Tuesday night, it appears the bull market in filtration is here to stay. The firm, which is likely best known for its Baldwin and Purolator brands, has been raising both profits and operating margins, benefiting from a rebound in the global economy and explosive Chinese growth. Sales for Q2 were up 12% year-over-year (YoY), while diluted EPS increased 36% to a record $0.64. Operating margins expanded to 16.9%, up from 14% in the year ago period. Sales in China grew 43% compared with last year's Q2. The strong quarterly performance led management to increase guidance for the year on both ends by a nickel, to $2.25-$2.40. Based on the midpoint of that range, CLC has a P/E of 18.6.
The strong performance of Clarcor echoed the strength seen in Pall Corp's (NYSE:PLL) June 8 quarterly report. The firm reported an increase in third quarter sales of 15.2% to $709.8 million, and pro forma EPS (excluding certain items) of $0.72, up 24%. Operating margins at Pall came in at 17.4% The strong Q3 results led management to say it expects the company to report full year earnings toward the higher end of its $2.80-$2.90 guidance. Based on the midpoint of the guidance range, Pall has about a 19 P/E ratio.
Each one of these companies is benefiting from increasing mining exploration and oil production, providing filters to heavy trucks and machines, as well as filters to remove particles from the air and water. Each company is expanding margins and increasing dividends, and each company is looking to continue to expand outside the US. As I noted earlier in the year when I wrote about Pall, the industry has seen consolidation of late, with Millipore being purchased after an auction for that firm. The potential for further consolidation in the space exists, with Pall being a rumored takeover candidate several times in the past 12 months. Even without a takeover, both stocks are solid investment ideas as each firm is focused on increasing both sales and profitability.
As profits and margins continue to expand for these filter makers, investors should continue to be rewarded for holding shares of Clarcor and Pall. Barring any major shocks to the global economy, the need for filters and filtration products will continue to expand, driving sales and profitability at both these firms. Consider each name as a play on industrial growth in an expanding global economy.
Disclosure: I am long PLL.