Donaldson (NYSE:DCI) Misses Q4 Revenue Estimates

Filtration equipment manufacturer Donaldson (NYSE:DCI) fell short of the market’s revenue expectations in Q4 CY2024, with sales flat year on year at $870 million. Its non-GAAP profit of $0.83 per share was 2.1% below analysts’ consensus estimates.

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“The Donaldson team delivered robust margins this quarter, displaying resilience and agility despite ongoing macroeconomic headwinds,” said Tod Carpenter, chairman, president and chief executive officer.

Company Overview

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

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can have short-term success, but a top-tier one grows for years. Over the last five years, Donaldson grew its sales at a tepid 5.5% compounded annual growth rate. This fell short of our benchmark for the industrials sector 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 recent history shows its demand slowed as its annualized revenue growth of 3.1% over the last two years is below its five-year trend.

We can better understand the company’s sales dynamics by analyzing its constant currency revenue, which excludes currency movements that are outside their control and not indicative of demand. Over the last two years, its constant currency sales averaged 3.6% year-on-year growth. Because this number aligns with its normal revenue growth, we can see Donaldson’s foreign exchange rates have been steady.

This quarter, Donaldson missed Wall Street’s estimates and reported a rather uninspiring 0.8% year-on-year revenue decline, generating $870 million of revenue.

Looking ahead, sell-side analysts expect revenue to grow 5.6% over the next 12 months. While this projection indicates its newer products and services will fuel better top-line performance, it is still below average for the sector.

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Operating Margin

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Donaldson has been an efficient company over the last five years. It was one of the more profitable businesses in the industrials sector, boasting an average operating margin of 14.1%. This result isn’t too surprising as its gross margin gives it a favorable starting point.

Looking at the trend in its profitability, Donaldson’s operating margin rose by 2.1 percentage points over the last five years, as its sales growth gave it operating leverage.

This quarter, Donaldson generated an operating profit margin of 14.4%, in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.

Earnings Per Share

We track the long-term change 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 is profitable.

Donaldson’s EPS grew at a solid 9.9% compounded annual growth rate over the last five years, higher than its 5.5% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

We can take a deeper look into Donaldson’s earnings to better understand the drivers of its performance. As we mentioned earlier, Donaldson’s operating margin was flat this quarter but expanded by 2.1 percentage points over the last five years. On top of that, its share count shrank by 5.8%. These are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.

Like with revenue, we analyze EPS over a more recent period because it can provide insight into an emerging theme or development for the business.

For Donaldson, its two-year annual EPS growth of 8.2% was lower than its five-year trend. We hope its growth can accelerate in the future.

In Q4, Donaldson reported EPS at $0.83, up from $0.81 in the same quarter last year. Despite growing year on year, this print missed analysts’ estimates, but we care more about long-term EPS growth than short-term movements. Over the next 12 months, Wall Street expects Donaldson’s full-year EPS of $3.52 to grow 9.1%.

Key Takeaways from Donaldson’s Q4 Results

Donaldson's revenue missed and its constant currency revenue fell short of Wall Street’s estimates. While EPS in the quarter also missed, the company reiterated its full-year EPS guidance. The market seems reassured by this guidance, and the stock traded up 1.8% to $70.53 immediately following the results.

So should you invest in Donaldson right now? We think that the latest quarter is only one piece of the longer-term business quality puzzle. Quality, when combined with valuation, can help determine if the stock is a buy. We cover that in our actionable full research report which you can read here, it’s free.