Donaldson Company: Zacks’ Bear of the Day Play

Donaldson Company (DCISnapshot Report) recently guided Wall Street down, and that means lower revenue and earnings projections. The stock is now a Zacks Rank #5 (Strong Sell) and it is the Bear of the Day.

Description

Donaldson Company makes and sells filtration systems and replacement parts. The company operates in the United States, Europe, the Asia Pacific, and internationally. Donaldson Company was founded in 1915 and is based in Minneapolis, Minnesota.

Earnings History

I normally expect to see a lot of earnings misses when I look at a Zacks Rank #5 (Strong Sell) stock. That is not the case for DCI as it has missed the Zacks Consensus Estimate only twice in the last six quarters. That is good, but beats alone will not give a stock a strong Zacks Rank.

Earnings Estimates

Estimates for DCI experienced a sudden drop recently, and that was the company telling investors that revenue and earnings were going to be lower than what was expected. The Zacks Consensus Estimate for Fiscal 2015 was already falling, as it stood at $1.93 in October of last year and then tumbled down to $1.896 in November. The next leg lower was in February of this year when the number slid to $1.76. Another penny was taken off the top before the big hit came at the start of May. The current number is $1.55.

The Fiscal 2016 Zacks Consensus Estimate is also seeing a lot of downward pressure. It has moved from $2.17 in October of last year to $1.87 – a drop of $0.30 per share.

Valuation

The valuation picture for DCI is not a great one. Yes, the trailing PE of 20x is just below the 23x industry average, but the forward PE of 23x is showing a premium ot the 21x industry average. The price to book multiple of 5.8x is showing an even bigger premium to the industry average of 2.8x. The price to sales is also showing a premium with a 1.9x multiple compared to the 1.5x industry average.

Investors would be wise to wait for the valuation metrics to show a discount to the industry averages as DCI is looking and earnings and revenue contraction in Fiscal 2015 while the industry average is showing growth for each.

Chart

Zacks has developed a chart that helps investors see how earnings estimates have impacted the price of the stock over the last several years. We call this chart the price and consensus chart, and each color coded lines represent analyst estimates over a designated year. As estimates increase, the stock tends to follow. The Zacks Rank is impacted by earnings estimate increases, beats and incorporates the idea of analyst agreement and magnitude. As a Zacks Rank #5 (Strong Sell) we see that estimates are moving lower and investors would be wise to wait until the estimates start to move higher.

Brian Bolan is a Stock Strategist for Zacks.com. He is the Editor in charge of the Zacks Home Run Investor service, a Buy and Hold service where he recommends the stocks in the portfolio.

He also runs the newest Zacks Investor service Stocks Under $10, where he looks for long term gains from low priced stocks. In each of these services, subscribers are sent buy and sell alerts when the editor is adding a new name or removing and old one.

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