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Donaldson (DCI) Displays Bright Prospects, Risks Persist


On Jan 8, we issued an updated research report on Donaldson Company, Inc. DCI.

In the past six months, this Zacks Rank #3 (Hold) stock has lost 5.7%, narrower than industry’s decline of 7.3%.

Existing Scenario

Donaldson expects strength in Off-Road, On-Road and Aftermarket business to drive revenues of its Engine Products segment, going forward. Also, the acquisition of BOFA International LTD (closed on Oct 22, 2018) is likely to strengthen the company's Industrial Products segment. Donaldson anticipates its year-over-year sales growth to lie between 6% and 10% in fiscal 2019 (ending July 2019).

Also, Donaldson is poised to boost up its competency on the back of its ongoing capital expenditure and innovation investments. In this regard, its capital expenditure totaled $28.2 million in first-quarter fiscal 2019 (ended October 2018), up 41.7% year over year. These investments were made to increase the company's existing production capacity, support future demand of its fast-growing products and enhance its ecommerce business set-up.

Moreover, Donaldson’s successful product launches like LifeTec filters and new program wins, particularly in China, are likely to drive its revenues growth trajectory.

However, weakening Gas Turbine Systems (GTS) business remains a major cause of concern for the company. Notably, revenues of the GTS business fell 3.1% year over year in the fiscal first quarter, primarily on account of decline in large turbine projects. As a matter of fact, GTS sales are predicted to dip in high single-digit in fiscal 2019.

This apart, increase in costs have been a major cause of concern for the company over the past few quarters. For instance, Donaldson’s cost of sales escalated 10.1% in fiscal first quarter.

Stocks to Consider

Some better-ranked stocks from the same space are Atkore International Group Inc. ATKR, Enersys ENS and iRobot Corp. IRBT. While Atkore International and Enersys sport a Zacks Rank #1 (Strong Buy), iRobot carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Atkore International surpassed estimates in each of the trailing four quarters, the average positive earnings surprise being 27.58%.

Enersys outpaced estimates thrice in the preceding four quarters, the average earnings surprise being 2.83%.

iRobot exceeded estimates in each of the preceding four quarters, the average positive earnings surprise being 102.97%.

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