Donaldson Earnings: Revenue Rises Despite Some Headwinds in Life Sciences; Our Thesis Is Unruffled

Narrow-moat-rated Donaldson DCI posted a 13.4% year-over-year increase in adjusted EPS, from $0.67 to $0.76, in its fiscal third quarter. We’ve maintained our $59 fair value estimate as nothing in the earnings results materially alters our long-term thesis. We view the name as fairly valued at current levels.

Donaldson’s third-quarter sales grew 2.6% year over year, or 5.4% on a constant-currency basis, as a roughly 8% increase in pricing was partially offset by a 3% currency translation headwind. On a constant-currency basis, mobile solutions increased 2.7%, industrial solutions increased 16.3%, and life sciences declined 9.4% as continued softness in disk drive products offset growth in food and beverage. Donaldson’s fiscal third-quarter operating margin increased by 120 basis points compared with the same period last year, as a 150-basis-point improvement in gross margin driven by pricing and input cost stabilization was partially offset by a 30-basis-point increase in operating expenses due to postpandemic hiring and discretionary expenses.

Management maintained its full-year fiscal 2023 adjusted EPS outlook at the midpoint but narrowed its guidance range to $3.00-$3.06 from $2.99-$3.07. Donaldson now anticipates full-year sales growth of 3%-5% (2%-6% previously), unchanged at the midpoint, but management lowered the midpoint of its operating margin guidance range by 20 basis points, from 14.8% to 14.6%. At the midpoint, the updated outlook bakes in sales growth of 3% in mobile solutions, 12% in industrial solutions, and 11% in life sciences. Looking beyond fiscal 2023, management reiterated its long-term targets and continues to target sales of around $4 billion and operating margins of around 16% by fiscal 2026.