A Quarterly Hiccup At Donaldson May Be An Opportunity For Long-Term Investors

Filtration is a pretty good business to be in – there have been several high-multiple acquisitions in the space over the years (often at mid-to-high teens multiples of EBITDA), with companies including Danaher (DHR), 3M (MMM), and Parker Hannifin (PH) among those that have paid up to get into the space.

For Donaldson (DCI), it’s been a cyclical business, but one that has generated healthy double-digit returns on capital for over a decade and annualized high-single-digit FCF growth for over 20 years. And now Donaldson is looking to address even more of the market, with targeted expansion into areas like food & beverage, specialty chemicals, and pharma that offer both higher growth rates and less cyclical growth than the core engine filtration business.

I like Donaldson quite a bit, but the valuation has rarely been all that attractive to me. With the Street unimpressed with the last quarter and selling the shares off, though, there looks to be a window of opportunity here. I see a high single-digit to low double-digit annualized total return potential at today’s price, which I think is a pretty good entry price for a proven performer in an attractive space.

 

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A Quarterly Hiccup At Donaldson May Be An Opportunity For Long-Term Investors