Recommending Donaldson (DCI) back in September, I liked the company for its leverage to an eventual recovery in heavy machinery (trucks and off-road equipment) and industrial demand, but even more for the growth potential the company had in its attempts to bring its very strong filtration technologies into new markets like food/beverage and life sciences. On top of that, I saw an M&A “kicker” as many filtration companies have been taken out in the past at pretty rich multiples.
Since that last article, these shares have risen about 25%, modestly outperforming the larger industrial group and roughly doubling the return of the S&P 500 (while lagging partial peer/comp Parker-Hannifin (PH)). I don’t see quite the near-term opportunity from a valuation perspective as before, but I still like the company’s leverage to recovering end-markets, and its demonstrated desire to grow new market opportunities (hiring a new VP to oversee growth efforts in life sciences).
Donaldson looks modestly undervalued now, with a long-term total annualization potential return on the higher end of what I’m seeing these days for high-quality industrial names (6% to 8%). I also do believe that M&A remains a potential outcome, and likely at a premium multiple. I wouldn’t buy or recommend buying Donaldson as a takeover candidate, but I do think there’s still a window of opportunity here for a company that will likely trade at a higher multiple once the end-market recoveries are obvious.
Read the full article here:
Donaldson Still Leveraged To High-Quality Revenue Growth Upside
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