Donaldson Could Clear the Air For Your Portfolio
Donaldson's earnings for the quarter ending July 31 (also the end of its fiscal 2011) were ahead of expectations. Its $65.8 million in quarterly profit were 29% above the previous year's net income and its $0.84 cents a share EPS beat expectations by a nickel.
Donaldson's sales also grew fast -- by 21% to $625.5 million -- $5.5 million more than Wall Street expected thanks to 26% growth in its engine-products segment, which includes aftermarket, aerospace and defense products.
And Donaldson remains optimistic. It's forecasting 7% to 15% sales growth for FY 2012 and EPS between $3.15 and $3.45 a share on sales of $2.45 billion to $2.6 billion, "bracketing the $3.21 a share on $2.52 billion in revenue currently expected by analysts polled by Thomson Reuters," according to MarketWatch.
Is this enough of a reason to invest in Donaldson? Probably not. But here are three reasons to consider it:
- Strong earnings reports. Donaldson has been able beat analysts’ expectations consistently and in all of its past five earnings reports.
- Increasing sales and profits and cash-rich balance sheet. Donaldson has been increasing sales and profits. Its revenue has grown at a 4.9% annual rate from $1.9 billion (2007) to $2.3 billion (2011) while its net income has increased at a 10.6% annual rate from $151 million (2006) to $226 million (2010) — yielding a solid 10% net profit margin. It has $206 million in long term debt and its cash rose at an annual rate of 49.3% from $55 million (2007) to $273 million (2011).
- Out-earning its cost of capital and improving. Donaldson is earning more than its cost of capital – and it’s improving. How so? It’s producing EVA Momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In 2011, Donaldson EVA momentum was 2%, based on 2010 revenue of $1.9 billion, and EVA that rose from 2010's $49 million to 2011's $92 million, using an 11% weighted average cost of capital.
- Expensive stock. Donaldson’s price-to-earnings-to-growth ratio of 2.38 (where a PEG of 1.0 is considered fairly priced) means its stock price is expensive. It currently has a P/E of 20 and its earnings per share are expected to grow 8.4% to $3.51 in FY 2013.