Donaldson Company, Inc. (NYSE:DCI) Disappoints
The market didn’t like the recent results, and they served as a salutary reminder that the industrial market still faces challenges this year. Sales were up 3%, but operating income declined 5%. In order to demonstrate the particulars with this company I’ve broken out some numbers below. The orange segments represent Industrial Products revenues, while the blue shows Engine Products revenues.
It’s not hard to see that its key end markets are construction and agricultural (aftermarket and off road) machinery, heavy trucks (on road), industrial filtration and gas turbine filters.
Here is how the relative segments have been trending in terms of quarterly revenues.
What the Industry is Saying
In order to assess its end markets it’s a good idea to go back to Alcoa Inc (NYSE:AA)’s recent results. There is a detailed outline of them here. The key thing to note here is that Alcoa Inc (NYSE:AA)’s predictions for its Heavy Truck and Trailer segment got progressively worse in 2012, and Europe and North America are set for declines in 2013. All growth prospects in the segment are expected to come from China.
Turning to gas turbines, Alcoa Inc (NYSE:AA) forecast 3%-5% growth for its industrial turbine sales, and it remains an area of strength. Gas Turbine revenues have been strong for Donaldson (up 79% in the quarter) on account of low gas prices causing electricity generators to run the turbines more. However, it is not all good news for Donaldson Company, Inc. (NYSE:DCI). For example, Joy Global Inc. (NYSE:JOY) is seeing ongoing weakness in its mining operations because low gas prices have reduced the demand for coal for electricity generation. Of course this is happening because gas prices have been low in the US and because growth has slowed in China. As such, Joy Global is facing ongoing challenges, and Donaldson Company, Inc. (NYSE:DCI) is talking about mining not picking up until later in 2013. Construction, mining and heavy trucking remain problematic sectors for Donaldson.
Caterpillar Inc. (NYSE:CAT) is a major customer of Donaldson Company, Inc. (NYSE:DCI) and is exposed to many of the same end markets. The fact that its EPS forecasts have been lowered over the last few months should have presaged the negative commentary from Donaldson on construction and mining. Much of CAT’s future growth depends on China, and Donaldson Company, Inc. (NYSE:DCI) remarking that CAT was still reducing inventory in China (primarily because of weakness in construction) is not a great sign, even as others are predicting better days in China.
Indeed, just as Alcoa Inc (NYSE:AA) predicted, demand from construction and mining OEM manufacturers has weakened in Asia and the Americas. This is a consequence of lower end demand, and it will take time for this to filter through.
Where Next For Donaldson?
The bullish case for Donaldson is dependent on conditions getting better in China and specifically within mining, construction and the heavy trucking industries. The market has been keen on this idea, but I think the information discussed above gives enough clues as to what to look for. If China’s construction industry is picking up you will see this in Caterpillar and Joy Global’s numbers before you see it with Donaldson. Similarly, Alcoa gives key guidance over many of its end markets, and my sense is this there isn’t enough hard evidence to get too excited yet.
Granted, China has the financial muscle to buy 7%-8% growth this year, but it is far from clear whether it will go towards the same kind of stimulus spending that it undertook in 2008. For now Donaldson Company, Inc. (NYSE:DCI) is talking of reduced visibility and lowering its full year outlook. It’s probably not the time to pile in, but rather monitor what its peer group is saying first.
The article Time To Buy This Cyclical Company? originally appeared on Fool.com and is written by Lee Samaha.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
