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Why Is Donaldson (DCI) Down 8.7% Since Last Earnings Report?
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It has been about a month since the last earnings report for Donaldson (DCI - Free Report) . Shares have lost about 8.7% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Donaldson due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
Donaldson Q3 Earnings Beat Estimates, Decline Y/Y
Donaldson has reported better-than-expected results for third-quarter fiscal 2020 (ended Apr 30, 2020), with earnings beating estimates by 31.6%.
The company’s adjusted earnings in the reported quarter were 50 cents per share, surpassing the Zacks Consensus Estimate of 38 cents. However, the bottom line decreased 13.8% from the year-ago quarter’s figure of 58 cents due to sales weakness caused by the pandemic and a fall in margins.
Top-Line Results
In the fiscal third quarter, Donaldson’s net sales were $629.7 million, reflecting a year-over-year decline of 11.7%. The results suffered from a 9.7% fall in organic sales due mainly to the adverse impacts of the pandemic. Forex woes too had a negative impact of 2%.
However, the top line surpassed the Zacks Consensus Estimate of $606.3 million.
On a geographical basis, the company’s net sales in the United States decreased 12% year over year. Results also suffered from a 12.5% decline in Europe, Middle East and Africa’s sales, and an 8.1% dip in the Asia Pacific’s sales. Sales in Latin America declined 15.8% year over year.
The company reports revenues under the following segments — Engine Products and Industrial Products. A brief snapshot of the segmental sales is provided below:
Engine Products’ (accounting for 66.8% of net sales in third-quarter fiscal 2020) sales were $420.4 million, reflecting a year-over-year decline of 14.1%.
The results were adversely impacted by a 25.1% fall in Off-Road, 46.5% in On-Road and 7.9% in Aftermarket sales. Also, the company recorded a 0.3% fall in Aerospace and Defense sales.
Revenues generated from Industrial Products (accounting for 33.2% of net sales in third-quarter fiscal 2020) were $209.3 million, decreasing 6.3% from the year-ago quarter.
Results suffered from a sales decline of 11.5% in Industrial Filtration Solutions, partially offset by a 6.2% rise in Gas Turbine Systems and a 4.9% increase in Special Applications’ sales.
Margin Profile
In the reported quarter, Donaldson’s cost of sales decreased 10.9% year over year to $420.5 million. It represented 66.8% of net sales versus 66.2% in the year-ago quarter. Adjusted gross margin in the quarter was 33.2%, down 60 basis points (bps) year over year. Lower sales were a setback in the quarter, partially offset by pricing, procurement, production and supply-chain measures as well as reduced raw material costs and favorable sales mix.
Operating expenses dipped 11.3% year over year to $124.7 million. It represented 19.8% of net sales versus 19.7% in the year-ago quarter. Adjusted operating margin in the quarter under review was 13.4%, down 50 bps year over year. Adjusted effective tax rate in the quarter was 24.9% as compared with 24.5% in the year-ago quarter.
Balance Sheet & Cash Flow
Exiting third-quarter fiscal 2020, Donaldson’s cash and cash equivalents were $326.5 million, up 54.7% from $211.1 million recorded in the last reported quarter. Long-term debt was up 23.4% sequentially to $735.1 million.
In the first three quarters of fiscal 2020, the company repaid the long-term debt of $111.1 million, while raised $262.7 million from long-term debts.
In the first three quarters of fiscal 2020, Donaldson generated net cash of $265.2 million from operating activities, reflecting an increase of 18.8% from the year-ago figure. Capital expenditure totaled $106.2 million versus $112.4 million in the year-ago quarter. Free cash flow in the reported quarter increased 43.5% year over year to $159 million.
In the first three quarters, the company used $94.3 million for repurchasing shares and $79.8 million for paying out dividends.
Outlook
Donaldson is wary about the uncertainties caused by the coronavirus outbreak. It kept its financial projections suspended for fiscal 2020 (ending July 2020) and fiscal 2021 (ending July 2021). Notably, estimates were withdrawn in April.
However, the company noted that share buybacks for the year will be 1.6% of outstanding shares. Capital expenditure will likely be lower, while liquidity will be solid. Sales in May will likely be down 24% year over year.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in estimates review. The consensus estimate has shifted 27.4% due to these changes.
VGM Scores
At this time, Donaldson has a strong Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. Following the exact same course, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Donaldson has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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Why Is Donaldson (DCI) Down 8.7% Since Last Earnings Report?
It has been about a month since the last earnings report for Donaldson (DCI - Free Report) . Shares have lost about 8.7% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Donaldson due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
Donaldson Q3 Earnings Beat Estimates, Decline Y/Y
Donaldson has reported better-than-expected results for third-quarter fiscal 2020 (ended Apr 30, 2020), with earnings beating estimates by 31.6%.
The company’s adjusted earnings in the reported quarter were 50 cents per share, surpassing the Zacks Consensus Estimate of 38 cents. However, the bottom line decreased 13.8% from the year-ago quarter’s figure of 58 cents due to sales weakness caused by the pandemic and a fall in margins.
Top-Line Results
In the fiscal third quarter, Donaldson’s net sales were $629.7 million, reflecting a year-over-year decline of 11.7%. The results suffered from a 9.7% fall in organic sales due mainly to the adverse impacts of the pandemic. Forex woes too had a negative impact of 2%.
However, the top line surpassed the Zacks Consensus Estimate of $606.3 million.
On a geographical basis, the company’s net sales in the United States decreased 12% year over year. Results also suffered from a 12.5% decline in Europe, Middle East and Africa’s sales, and an 8.1% dip in the Asia Pacific’s sales. Sales in Latin America declined 15.8% year over year.
The company reports revenues under the following segments — Engine Products and Industrial Products. A brief snapshot of the segmental sales is provided below:
Engine Products’ (accounting for 66.8% of net sales in third-quarter fiscal 2020) sales were $420.4 million, reflecting a year-over-year decline of 14.1%.
The results were adversely impacted by a 25.1% fall in Off-Road, 46.5% in On-Road and 7.9% in Aftermarket sales. Also, the company recorded a 0.3% fall in Aerospace and Defense sales.
Revenues generated from Industrial Products (accounting for 33.2% of net sales in third-quarter fiscal 2020) were $209.3 million, decreasing 6.3% from the year-ago quarter.
Results suffered from a sales decline of 11.5% in Industrial Filtration Solutions, partially offset by a 6.2% rise in Gas Turbine Systems and a 4.9% increase in Special Applications’ sales.
Margin Profile
In the reported quarter, Donaldson’s cost of sales decreased 10.9% year over year to $420.5 million. It represented 66.8% of net sales versus 66.2% in the year-ago quarter. Adjusted gross margin in the quarter was 33.2%, down 60 basis points (bps) year over year. Lower sales were a setback in the quarter, partially offset by pricing, procurement, production and supply-chain measures as well as reduced raw material costs and favorable sales mix.
Operating expenses dipped 11.3% year over year to $124.7 million. It represented 19.8% of net sales versus 19.7% in the year-ago quarter. Adjusted operating margin in the quarter under review was 13.4%, down 50 bps year over year. Adjusted effective tax rate in the quarter was 24.9% as compared with 24.5% in the year-ago quarter.
Balance Sheet & Cash Flow
Exiting third-quarter fiscal 2020, Donaldson’s cash and cash equivalents were $326.5 million, up 54.7% from $211.1 million recorded in the last reported quarter. Long-term debt was up 23.4% sequentially to $735.1 million.
In the first three quarters of fiscal 2020, the company repaid the long-term debt of $111.1 million, while raised $262.7 million from long-term debts.
In the first three quarters of fiscal 2020, Donaldson generated net cash of $265.2 million from operating activities, reflecting an increase of 18.8% from the year-ago figure. Capital expenditure totaled $106.2 million versus $112.4 million in the year-ago quarter. Free cash flow in the reported quarter increased 43.5% year over year to $159 million.
In the first three quarters, the company used $94.3 million for repurchasing shares and $79.8 million for paying out dividends.
Outlook
Donaldson is wary about the uncertainties caused by the coronavirus outbreak. It kept its financial projections suspended for fiscal 2020 (ending July 2020) and fiscal 2021 (ending July 2021). Notably, estimates were withdrawn in April.
However, the company noted that share buybacks for the year will be 1.6% of outstanding shares. Capital expenditure will likely be lower, while liquidity will be solid. Sales in May will likely be down 24% year over year.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in estimates review. The consensus estimate has shifted 27.4% due to these changes.
VGM Scores
At this time, Donaldson has a strong Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. Following the exact same course, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Donaldson has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.