Donaldson Deserves A Second Look After A Steep Decline

Writing about Donaldson (NYSE:DCI) in August of 2021, I noted that I was more concerned about valuation with this high-quality filtration company, but that I was inclined to “let the winner run” on the basis of strong near-term demand and intriguing long-term diversification and growth opportunities.

That was not a good call, as the shares have since declined almost 25% over that period. While it’s true that many industrials have been taken to the woodshed over the last six months on fears related to supply chain pressures, global macro instability, and so on, Donaldson has dramatically underperformed, trailing the industrial space by almost 20%. All the more curious is that sell-side expectations for Donaldson actually aren’t all that much lower now; margin assumptions for FY’22 have come down, but have been offset by higher revenue.

I find Donaldson much more interesting at these levels. Not only do I believe there’s a healthy off-road cycle left to leverage, but I believe the company’s efforts to reapply core technologies into new markets like food/beverage and life sciences can drive higher revenue and FCF over time. I wouldn’t call the shares “screaming buy” cheap, but I do think the valuation is more interesting for long-term investors.

 

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Donaldson Deserves A Second Look After A Steep Decline