Donaldson Delivering, And Updated Guidance For FY'23 Could Be A Catalyst

I’ve liked filtration specialist Donaldson (NYSE:DCI) for a while now, and not only are the shares up about 15% since my last update (handily beating the broader market and the industrial sector), they’ve continued to beat the market (and the industrial group) since my initial write-up for Seeking Alpha. The thesis then and now was maximizing the value of the legacy heavy machinery and industrial filtration businesses while exploring opportunities to extend those core competencies into new markets like food/beverage, life sciences, and other process markets where filtration is important (and acquire new, complementary, competencies through M&A along the way).

I’ll be very curious to see what management says about guidance when it reports fiscal first quarter earnings later this month. The initial guide for FY’23 back in August surprised the Street with its conservatism, and the recent earnings/guidance calls from heavy machinery companies have been relatively good. Moreover, at a time when many short-cycle businesses are starting to roll over, many heavy machinery companies are carrying good backlogs into 2023 and underlying activity/utilization is still healthy.

With the shares performing well, I don’t see as much undervaluation here. I think the shares are still priced for long-term annualized returns in the high single-digits (around 8%), but near-term upside looks capped at around the mid-$60’s without a stronger outlook. There are worse things than owning a good company at a reasonable price, but there are more options now for investors and I’m not as inclined to chase Donaldson.

 

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Donaldson Delivering, And Updated Guidance For FY'23 Could Be A Catalyst