Donaldson Co. Inc.’s analysis versus peers uses the following peer-set: Pall Corporation (NYSE:PLL), CLARCOR Inc. (NYSE:CLC), Hangzhou Hangyang Co., Ltd. (SHE:002430), Entegris, Inc. (NASDAQ:ENTG), Fujian Longking Co., Ltd (SHA:600388) and CECO Environmental Corp. (NASDAQ:CECE). The table below shows the preliminary results along with the recent trend for revenues, net income and returns.
| Quarterly (USD million) | 2012-10-31 | 2012-07-31 | 2012-04-30 | 2012-01-31 | 2011-10-31 |
|---|---|---|---|---|---|
| Revenues | 588.9 | 656.8 | 647.2 | 580.9 | 608.3 |
| Revenue Growth % | (10.3) | 1.5 | 11.4 | (4.5) | (2.7) |
| Net Income | 54.1 | 71.0 | 70.9 | 53.8 | 68.6 |
| Net Income Growth % | (23.8) | 0.0 | 31.8 | (21.5) | 4.2 |
| Net Margin % | 9.2 | 10.8 | 11.0 | 9.3 | 11.3 |
| ROE % (Annualized) | 23.2 | 29.8 | 29.7 | 23.9 | 30.1 |
| ROA % (Annualized) | 12.6 | 16.3 | 16.5 | 12.6 | 15.8 |
Valuation Drivers
Donaldson Co. Inc.’s current Price/Book of 5.2 is about median in its peer group. DCI-US’s operating performance is higher than the median of its chosen peers (ROE of 27.1% compared to the peer median ROE of 17.0%) but the market does not seem to expect higher growth relative to peers (PE of 20.5 compared to peer median of 17.7) but simply to maintain its relatively high rates of return.
The company’s median net profit margins of 10.1% and relative asset efficiency (asset turns of 1.4x compared to peer median of 1.0x) give it some operating leverage. DCI-US’s net margin has declined 0.5 percentage points from last year’s high but remains above its four-year average net margin of 8.8.
Economic Moat
DCI-US’s revenues have changed in-line with its peers (year-on-year change in revenues is 8.7%) but its earnings have lagged (annual reported earnings have changed by 17.3% compared to the peer median of 29.1%), implying that the company has less control over its costs relative to its peers. DCI-US is currently converting every 1% of change in revenue into 2.0% change in annual reported earnings.
DCI-US’s return on assets is above its peer median both in the current period (14.4% vs. peer median 10.8%) and also over the past five years (12.4% vs. peer median 7.1%). This performance suggests that the company’s relatively high operating returns are sustainable.
The company’s gross margin of 37.1% is around peer median suggesting that DCI-US’s operations do not benefit from any differentiating pricing advantage. In addition, DCI-US’s pre-tax margin of 14.4% is also around the peer median suggesting no operating cost advantage relative to peers.
Growth & Investment Strategy
While DCI-US’s revenues have grown faster than the peer median (10.1% vs. 6.3% respectively for the past three years), the market gives the stock an about peer median PE ratio of 20.5. This suggests that the market has some questions about the company’s long-term strategy.
DCI-US’s annualized rate of change in capital of 7.4% over the past three years is around the same as its peer median of 6.8%. This investment has generated a better than peer median return on capital of 19.4% averaged over the same three years. The greater than peer median rate of return suggest that the company may be under investing in growth.
Earnings Quality
DCI-US’s reported net income margin for the last twelve months is around the peer median (10.1% vs. peer median of 10.1%). However, the company has also recorded a relatively low level of accruals (0.7% vs. peer median of 3.3%) which suggests possible overstatement of its reported net income.
DCI-US’s accruals over the last twelve months are around zero. However, this modestly positive level is also less than the peer median which suggests some amount of building of reserves.
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Disclaimer
This article was originally written by abha.dawesar, and posted on CapitalCube.
