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Can Donaldson (DCI) Pull Off a Surprise in Q1 Earnings?


Donaldson Company, Inc. DCI is set to report first-quarter fiscal 2017 results, before the opening bell on Dec 1.

Last quarter, the company had posted a negative earnings surprise of 8.0%. Donaldson has had a choppy earnings history, having beaten estimates twice for as many misses over the four trailing quarters, with an average negative surprise of 1.7%.

Factors to Consider

Donaldson’s fiscal first-quarter results are likely to benefit from consistent first-fit program wins and sturdy aftermarket performance. As a matter of fact, the company’s programs in Engine air and liquid market enjoy a win rate of over 75%, with the potential to generate at least half a billion dollars in future revenues. Also, during the fiscal fourth quarter, the company had commenced manufacturing heavy-duty air filters for both on-road and off-road equipment markets, in order to fortify its foothold in Europe.

This facility is expected to be conducive for the company’s liquid business, thus supplementing top-line performance for the soon-to-be reported quarter and beyond. In addition, Donaldson’s Down Flow Evolution or DFE family of dust collectors, which has been a key profit churner ever since its launch, is anticipated to stoke top-line growth for the fiscal first quarter. Also, increasing replacement on the first-fit program and higher retention rates in the aftermarket business have been fueling growth of the company’s industry-defining filtration product, PowerCore.

Impressive market traction of the company’s major products looks promising for the fiscal first-quarter results. This apart, Donaldson’s quarterly results are likely to reap the incremental restructuring benefits of the streamlining initiatives implemented earlier. Globally, Donaldson has identified opportunities to trim about $8 million of expenses out of their respective businesses from these restructuring actions. In this regard, the ERP implementation scheme executed earlier is expected to improve inventory management, pricing & processes and benefit expense run rate, by a few million dollars.

Despite these positives, Donaldson has been grappling with a host of macroeconomic issues for the past few quarters. These have been affecting its financial performance. Persistent weakness in the global agriculture, mining equipment and construction markets are estimated to hamper both Engine Products and Industrial Products sales. Project deferrals and volatility in global demand are likely to weigh down on Gas Turbines’ sales. Moreover, weakness in membrane and semiconductor businesses is adding to the company’s concern.

Especially, precipitous decline in the disk drive business has accelerated over the past few quarters, adding to the woes of the Industrial Products segment. In addition, currency fluctuations had caused sales to decline by $5.1 million during fourth-quarter fiscal 2016 and are estimated to play a spoilsport for the quarter to be reported as well. This apart, strong competition and fluctuations in commodity process add to Donaldson’s woes for this quarter.

Earnings Whispers

Our proven model does not conclusively show that Donaldson will beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here as you will see below.

Zacks ESP: Earnings ESP for the company is currently 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate are pegged at 35 cents. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Donaldson’s Zacks Rank #3, when combined with 0.00% ESP, makes surprise prediction difficult.

Note that we caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

DONALDSON CO Price and EPS Surprise

DONALDSON CO Price and EPS Surprise | DONALDSON CO Quote

Stocks That Warrant a Look

Here are some companies that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat:

CECO Environmental Corp. CECE, with an Earnings ESP of +5.26% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

MRC Global Inc. MRC, with an Earnings ESP of +10.00% and a Zacks Rank #2.

Middleby Corp. MIDD, with an Earnings ESP of +1.60% and a Zacks Rank #2.

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