With strong production growth in commercial vehicles and recoveries in many short-cycle industries, not to mention strong demand for freight capacity, Donaldson (DCI) isn't hurting for business these days. While component shortages are starting to crimp truck production, and are likely capping Donaldson's revenue upside, the overall operating environment is still healthy.
I'm excited to see what Donaldson can achieve by repurposing its core air and liquid filtration technologies for markets like food/beverage and pharma/life sciences, as well as markets like electronics and specialty chemicals, but Rome wasn't built in a day and this is going to be a multiyear process, likely one that requires M&A spending in what is not a cheap market.
These shares have modestly outperformed the S&P 500 and the broader industrial sector since my last update, and I think another beat-and-raise quarter is likely when Donaldson reports again in early September. Valuation is so-so. I can see some upside from here and the long-term prospective return isn't bad compared to what I think is an expensive sector, but a lot of my bullishness stems from a fundamental leaning toward "letting your winners run" and a belief that Donaldson's future growth and margin opportunities could drive even better results than I'm currently modelling.
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