Here's Why You Should Add Donaldson (DCI) to Your Portfolio

Earlier this month, filtration systems and replacement parts manufacturer, Donaldson Company, Inc.'s DCI third-quarter fiscal 2017 earnings trumped estimates, scoring a hat-trick of earnings beats. Buoyed by stabilization in market conditions, robust sales and complementary acquisitions, the company raised both its top- and bottom-line guidance for fiscal 2017 for the second time in a row.

Encouragingly, the stock has had an impressive run on the bourse, gaining 33.5% over the past one year, and outperforming the Zacks categorized Pollution Control Equipment and Services industry’s average of 30.9%.  We believe the company has a number of solid growth drivers, which will continue to stoke growth for the remainder of the fiscal 2017. Read on to find out the key factors which make this Zacks Rank #2 (Buy) company an attractive proposition for investors right now.

Why Should You Buy?

Impressive VGM Score: The company has a VGM Score of ‘B’. The score identifies stocks that have the most attractive value, growth and momentum characteristics, and a good score indicates stronger chances of success. Our research shows that stocks with Style Scores of ‘A’ or ‘B,’ when combined with a Zacks Rank #1 (Strong Buy) or 2, offer the best upside potential.

Superior ROA: Donaldson’s Return on Assets (ROA) ratio for the trailing 12 months is 12.1%, higher than that of the industry average of 9.1%. This indicates that the company uses its capital more efficiently and profitably compared with the industry.

Analyst Sentiment Positive: Analysts have become increasingly bullish on the company over the last month. The Zacks Consensus Estimate for full-year 2017 earnings trended up over the same time frame from $1.66 to $1.70, supported by eight upward estimate revisions versus zero downward.

Glance at Major Catalysts: Donaldson is beginning to experience signs of stabilization in its end markets, which are expected to benefit the company in the upcoming quarters. The positives include effects of restocking, favorable commodity prices, decent rig counts and stable industrial production. Donaldson projects fiscal 2017 adjusted earnings per share in the range of $1.67–$1.71 compared with the earlier guidance of $1.60–$1.68.

The company believes that benefit from the Northern Technical, L.L.C. escrow settlement, which occurred in the fiscal first quarter, will supplement earnings growth. Currently, Donaldson expects fiscal 2017 sales to increase up to 6% from fiscal 2016, up from the previously guided range of 2–4%. The guidance hike is primarily attributable to the additional sales accruing from the recently acquired filtration systems firm, Hy-Pro Corporation.

In terms of segments, Donaldson estimates Engine Products sales to rise 10–11% year over year, mainly supported by robust performance of the Aftermarket, Off-Road, and Aerospace and Defense segments. For the Industrial Products segment, the company expects sales to decline in the range of 3–2% on a year-over-year basis. Unimpressive Gas Turbine Systems and Special Applications performance are also expected to play spoilsport.

Streamlining Efforts: In order to maximize growth opportunities, Donaldson has been undertaking restructuring initiatives to align its operating and manufacturing cost structure. The company expects to realize about $12 million of incremental restructuring benefits in fiscal 2017 from the actions taken in fiscal 2016. As a matter of fact, Donaldson’s profitability has benefited significantly from restructuring actions that were implemented over the last 12 months.

Globally, the company has identified opportunities to cut about $8 million of expenses out of their respective businesses from these restructuring actions. Donaldson believes that its previously completed ERP implementation program will help slash its expense run rate by a few million dollars. Going forward, ERP implementation is expected to improve inventory management, pricing and processes, adding to Donaldson’s strength.

Other Stocks to Consider

Other top-ranked stocks in the industry include Barnes Group Inc. B, ACCO Brands Corporation ACCO and Ingersoll-Rand Plc IR. Each stock carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Barnes Group has a solid earnings surprise history for the trailing four quarters, having beaten estimates each time for an average of 8.9%.

ACCO Brands has a positive average earnings surprise of 79.7% for the last four quarters, beating estimates all through.

With three beats over the trailing four quarters, Ingersoll-Rand has a positive average earnings surprise of 3.6%.

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