Donaldson Company: A Boring Stock That Knows How to Deliver Earnings

| About: Donaldson Co (DCI)

I wanted to mention Donaldson’s (NYSE:DCI) earnings report from last week when I was out. (Call Transcript) This is a boring stock but it certainly knows how to deliver earnings. For the July quarter, which is the company’s fiscal fourth quarter, Donaldson earned 60 cents a share compared with 53 cents for last year's fourth quarter.

That’s a pretty nice increase although the 60 cents a share was a penny below Wall Street’s consensus. If we want to split hairs, the EPS came in at 60.26 so we’re not talking about a huge miss.

For fiscal 2008, Donaldson earned $2.12 a share. If you recall, the company raised its 2008 forecast three times last year. This is Donaldson’s 19th straight record year!

Bill Cook, the Chairman, President and CEO, said:

We also set a new sales record in the fourth quarter, exceeding $600 million for the first time, and a new sales record for the year as we delivered our first $2 billion sales year. Our sales strength was broad-based again this quarter as Engine Products were up 13 percent and Industrial Products were up 20 percent. Geographically, sales grew 24 percent in Europe and 17 percent in Asia, driven by the combination of organic sales volume growth and the benefits of the stronger foreign currencies, and sales grew 9 percent in NAFTA.

Our sales trends remain positive as we enter fiscal 2009. We expect to continue making progress on our operating improvement initiatives while continuing to invest in our business for future growth. Although we expect raw material costs to continue to increase, we will work to offset the impact through internal cost reduction efforts, raw material price indexing in some markets, and price increases in other markets. While we are cautious about global economic conditions, we believe that the combination of our business model and extensive diversification of our products, end markets, and geographies will lead to our 20th consecutive year of record earnings.

For 2009, the company sees EPS climbing 9%-11% which comes to $2.30 to $2.40. I think that’s a bit of low-balling so it can raise estimates later. Still, it’s good to be cautious. Bear in mind that Donaldson earned $1.83 a share in 2007 so that translates to growth of nearly 16%.

So what about a P/E ratio? Well, that's always the tricky part, so some guesswork is needed. Donaldson's stock has pulled back from over $51 in May to under $40 recently. That seems like a good buying opportunity. Given Donaldson's historic P/E ratio and its ability to deliver consistent earnings growth, I would give the stock an earnings multiple of 20. Your mileage may vary. That places the stock at $46 to $48 a year from now. That's a decent return. Donaldson also pays a small quarterly dividend (11 cents a share), but it has increased for 22 straight years.

Here's a look at Donaldson's incredible earnings streak.

Year.............Sales.................EPS
1990............$422.9...............$0.19
1991............$457.7...............$0.21
1992............$482.1...............$0.23
1993............$533.3...............$0.26
1994............$593.5...............$0.30
1995............$704.0...............$0.37
1996............$758.6...............$0.42
1997............$833.3...............$0.50
1998............$940.4...............$0.57
1999............$944.1...............$0.66
2000............$1,092.3............$0.76
2001............$1,137.0............$0.83
2002............$1,126.0............$0.95
2003............$1,218.3............$1.05
2004............$1,415.0............$1.18
2005............$1,595.7............$1.27
2006............$1,694.3............$1.55
2007............$1,918.8............$1.83
2008............$2,232.5............$2.12

Disclosure: Long DCI.