Donaldson (DCI) Displays Bright Prospects Amid Headwinds

On Jul 20, we issued an updated research report on Donaldson Company, Inc. DCI.

In the past three months, this Zacks Rank #3 (Hold) stock has returned 19.9% compared with the industry’s growth of 15.6%.



Existing Business Scenario

Donaldson is poised to benefit from solid product portfolio, supply-chain optimization, growing e-commerce business and growth investments in the quarters ahead. The company has been operating in critical markets and manufacturing replacement parts despite several restrictions imposed by governments to fight the coronavirus outbreak. Going forward, strength in its process filtration business is likely to benefit its Industrial Products segment. In addition, some of the cost-reduction measures, being taken by the company amid the pandemic, will likely help it to maintain a healthy margin performance.

Also, the company remains committed to rewarding shareholders through dividend payouts and share buyback programs. For instance, in the first nine months of fiscal 2020 (ended April 2020), it used $94.3 million for purchasing treasury stocks and $79.8 million for paying out dividends. For fiscal 2020 (ending July 2020), total share buybacks will likely be 1.6% of the company’s outstanding shares.

However, it expects the pandemic-related uncertainties to continue impacting its operations in the quarters ahead. Projections for both fiscal 2020 (ending July 2020) and 2021 (ending July 2021) were kept suspended. However, it did mention that sales in May will likely fall 24% year over year.

In addition, its highly leveraged balance sheet remains a major concern. Notably, exiting the third-quarter fiscal 2020 (ended April 2020), Donaldson’s long-term debts were $735.1 million, reflecting 23.4% growth on a sequential basis. Also, its cash and cash equivalents of $326.5 million were not impressive, considering its high debt level.

Key Picks

Some better-ranked stocks from the Zacks Industrial Products sector are AGCO Corporation AGCO, Dover Corporation DOV and Cintas Corporation CTAS. While AGCO currently sports a Zacks Rank #1 (Strong Buy), Dover and Cintas carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

AGCO delivered an earnings surprise of 41.73%, on average, in the trailing four quarters.

Dover delivered an earnings surprise of 7.13%, on average, in the trailing four quarters.

Cintas delivered an earnings surprise of 8.33%, on average, in the trailing four quarters.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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