Donaldson (NYSE:DCI) Misses Q2 Revenue Estimates

Filtration equipment manufacturer Donaldson (NYSE:DCI) missed analysts’ expectations in Q2 CY2024, with revenue up 6.4% year on year to $935.4 million. It made a non-GAAP profit of $0.94 per share, improving from its profit of $0.78 per share in the same quarter last year.

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Playing a vital role in the historic Apollo 11 mission, Donaldson (NYSE:DCI) manufacturers and sells filtration equipment for various industries.

Gas and Liquid Handling

Gas and liquid handling companies possess the technical know-how and specialized equipment to handle valuable (and sometimes dangerous) substances. Lately, water conservation and carbon capture–which requires hydrogen and other gasses as well as specialized infrastructure–have been trending up, creating new demand for products such as filters, pumps, and valves. On the other hand, gas and liquid handling companies are at the whim of economic cycles. Consumer spending and interest rates, for example, can greatly impact the industrial production that drives demand for these companies’ offerings.

Sales Growth

A company’s long-term performance can give signals about its business quality. Even a bad business can shine for one or two quarters, but a top-tier one tends to grow for years. Unfortunately, Donaldson’s 4.7% annualized revenue growth over the last five years was sluggish. This shows it failed to expand in any major way and is a rough starting point for our analysis.

Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Donaldson’s annualized revenue growth of 4.1% over the last two years aligns with its five-year trend, suggesting its demand was consistently weak.

This quarter, Donaldson’s revenue grew 6.4% year on year to $935.4 million, missing Wall Street’s estimates. Looking ahead, Wall Street expects sales to grow 5.5% over the next 12 months.

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Operating Margin

Donaldson has been an optimally-run company over the last five years. It was one of the more profitable businesses in the industrials sector, boasting an average operating margin of 13.9%. This result isn’t too surprising as its gross margin gives it a favorable starting point.

Analyzing the trend in its profitability, Donaldson’s annual operating margin rose by 2 percentage points over the last five years, showing its efficiency has improved.

This quarter, Donaldson generated an operating profit margin of 15.6%, up 1.9 percentage points year on year. This increase was encouraging, and since the company’s operating margin rose more than its gross margin, we can infer it was recently more efficient with expenses such as sales, marketing, R&D, and administrative overhead.

EPS

We track the long-term growth in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth was profitable.

Donaldson’s EPS grew at a decent 9.1% compounded annual growth rate over the last five years, higher than its 4.7% annualized revenue growth. This tells us the company became more profitable as it expanded.

Diving into Donaldson’s quality of earnings can give us a better understanding of its performance. As we mentioned earlier, Donaldson’s operating margin expanded by 2 percentage points over the last five years. On top of that, its share count shrank by 5.6%. These are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.

Like with revenue, we also analyze EPS over a shorter period to see if we are missing a change in the business. For Donaldson, its two-year annual EPS growth of 13% was higher than its five-year trend. This acceleration made it one of the faster-growing industrials companies in recent history.

In Q2, Donaldson reported EPS at $0.94, up from $0.78 in the same quarter last year. This print beat analysts’ estimates by 5.8%. Over the next 12 months, Wall Street expects Donaldson to grow its earnings. Analysts are projecting its EPS of $3.42 in the last year to climb by 8.9% to $3.73.

Key Takeaways from Donaldson’s Q2 Results

It was good to see Donaldson beat analysts’ EPS expectations this quarter. On the other hand, its revenue unfortunately missed and its EPS guidance for the full year fell short of Wall Street’s estimates. Overall, this was a weaker quarter. The stock remained flat at $74.42 immediately after reporting.

So should you invest in Donaldson right now? When making that decision, it’s important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it’s free.