Call Traders Bet on Strong Earnings from Donaldson Company

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Donaldson Company Inc. ( DCI ) announced after the close on Monday that its fiscal fourth-quarter profit surged on higher worldwide sales and improving margins.

DCI earnings rolled in at $51.2 million, or 65 cents per share, up from $23.6 million, or 30 cents per share, a year earlier. Wall Street expected 64 cents. Revenue jumped 22% to $515.2 million, above the $470 million to $500 million projected by the company in May. Gross margin widened to 36.3% from 32.8%.

"Our overall sales improvement was truly global as local currency sales increased 28% in the Americas, 25% in Europe, 18% in Asia and 8% in South Africa," said Chairman and Chief Executive Bill Cook.

The company said its sales have benefited from the improving economy, new products, and growth in emerging markets, while its cost-cutting and restructuring measures have positioned it well for the future. In fact, the firm has raised its quarterly dividend twice this year.

For the new year, the company sees earnings of $2.28 to $2.48 per share on revenue of about $2 billion. Analysts expected $2.45 and $2.06 billion, respectively.

Heading into the earnings report, options players jumped on the stock's calls. During the past 10 trading sessions, 6.8 calls have been purchased to open on the International Securities Exchange (ISE) for every one put purchased to open. This ratio of calls to puts is higher than 98% of all those taken during the past year. In other words, options players have rarely snatched up more calls than puts during the past year.

Meanwhile, sentiment is far from an optimistic extreme. The Schaeffer's put/call open interest ratio for DCI comes in at 0.99, as put open interest nearly equals call open interest among options slated to expire in less than three months. This ratio of puts to calls is higher than 87% of all those taken during the past year, indicating that traders have been more pessimistically aligned toward the shares only 13% of the time during the past 12 months.

Elsewhere, we find that Wall Street is still giving the security a relatively cold shoulder. According to Zacks , the equity has earned five "buy" ratings, seven "holds," and one "sell" rating. While this leaves ample room for potential upgrades, analysts might be hesitant to jump on the security considering that its revenue outlook came in slightly below expectations.

Technically speaking, the stock is sitting on a gain of nearly 1% for the year. The equity has stair-stepped higher along the support of its rising 10-month moving average since May 2009, but has recently stalled along support in the 41-42 region.

 MONTHLY CHART OF DCI SINCE JANUARY 2009 WITH 10-MONTH MOVING AVERAGE

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This article appears in: Investing , Options

Referenced Stocks: DCI

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