Donaldson Earnings: Thesis Remains Intact as the Company Enters Fiscal 2024

Narrow-moat-rated Donaldson DCI reported full-year fiscal 2023 earnings slightly below our expectations as ongoing softness in the disk drive market affected growth. Nonetheless, the company still generated full-year sales and earnings per share growth of 4% and 9%, respectively, as Donaldson benefited from strength in other end markets as well as favorable pricing and input cost stabilization. As a result, we are raising our fair value estimate to $63 from $59 due to accelerating revenue growth as well as the time value of money.

During the fourth quarter, mobile solutions sales declined 5% from the prior-year period as an improved global supply chain led original equipment manufacturer customers to continue normalizing their inventory. As a result, aftermarket sales declined 7% year over year. Nonetheless, we continue to view Donaldson’s razor and blade model as a source of the company’s narrow moat and believe aftermarket sales will return to growth. Life sciences also declined during the quarter as lower disk drive market demand resulted in sales declining 12% year over year. However, we expect data center and cloud computing demand to recover in the coming quarters, which should help life sciences achieve double-digit growth in the coming years. Industrial solutions provided a bright spot for the company during the fourth quarter, increasing 10% year over year as the segment experienced strength across all end markets.

Additionally, during the quarter, management announced the acquisition of Univercells Technologies, a global producer of innovative biomanufacturing solutions for cell and gene therapy research, development, and commercial manufacturing. This is Donaldson’s fourth life sciences acquisition as the company continues to invest heavily in the segment. Management also provided full-year fiscal 2024 guidance and expects 5% sales growth and 15% operating margins, both at the midpoint, driven by strength across all business segments.