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Donaldson Still Leveraged To High-Quality Revenue Growth Upside

Mar. 08, 2021 12:44 AM ETDonaldson Company, Inc. (DCI)
Stephen Simpson profile picture
Stephen Simpson


  • Donaldson had a somewhat mixed fiscal second quarter, as certain industrial markets remain weak, but off-highway machinery is recovering nicely, process filtration is growing strongly, and guidance was improved.
  • The real sizzle to the Donaldson story remains the multibillion-dollar addressable market/revenue expansion opportunities in markets like food/beverage and life sciences.
  • Donaldson offers a long-term annualized return on the higher end of high-quality industrials today, and filtration companies have often traded at robust premiums in the past.

Recommending Donaldson (NYSE:DCI) back in September, I liked the company for its leverage to an eventual recovery in heavy machinery (trucks and off-road equipment) and industrial demand, but even more for the growth potential the company had in its attempts to bring its very strong filtration technologies into new markets like food/beverage and life sciences. On top of that, I saw an M&A “kicker” as many filtration companies have been taken out in the past at pretty rich multiples.

Since that last article, these shares have risen about 25%, modestly outperforming the larger industrial group and roughly doubling the return of the S&P 500 (while lagging partial peer/comp Parker-Hannifin (PH)). I don’t see quite the near-term opportunity from a valuation perspective as before, but I still like the company’s leverage to recovering end-markets, and its demonstrated desire to grow new market opportunities (hiring a new VP to oversee growth efforts in life sciences).

Donaldson looks modestly undervalued now, with a long-term total annualization potential return on the higher end of what I’m seeing these days for high-quality industrial names (6% to 8%). I also do believe that M&A remains a potential outcome, and likely at a premium multiple. I wouldn’t buy or recommend buying Donaldson as a takeover candidate, but I do think there’s still a window of opportunity here for a company that will likely trade at a higher multiple once the end-market recoveries are obvious.

Mixed Results in Fiscal Q2, As Vehicles Start To Recover

Donaldson’s fiscal second quarter was mixed, but positive on balance, as revenue and segment earnings exceeded expectations and the negative parts (the Industrial Products segments) weren’t that weak. I’d also point to healthy guidance for the remainder of the year, with the low end of guidance lifted above the prior sell-side average estimate and the midpoint about 4% higher.

This article was written by

Stephen Simpson profile picture
Stephen Simpson is a freelance financial writer and investor.Spent close to 15 years on the Street (sell-side, buy-side, equities, bonds).

Analyst’s Disclosure: I/we 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.

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