If you want to wow your friends with your investment acumen at the neighborhood Christmas party, leave Donaldson (NYSE:DCI) out of the mix. Not that it's been a dog; it's up more than 30% year to date. But despite its lofty status as a "global leader in filtration technology," the company fails to captivate those uninterested in filters for engines, turbines, and the like. Go figure.
For those who look a little closer, the company has considerable charm, and its latest quarter did not disappoint. Sales shot up 18% to $525.6 million; though a significant part of this came from favorable currency effects, sales would have risen 13% anyway. Net income increased even more, rising 20% to $43.3 million, and earnings per share jumped 23% to $0.53, beating analyst estimates by a nickel.
Though the engine products division carries a wider pre-tax margin and generates most of the profits, sales this quarter were driven by strength in the company's industrial products segment, which rose more than 27% to $232.4 million. Like Cummins (NYSE:CMI), Woodward Governor (NASDAQ:WGOV), and others serving the global market for gas turbines, Donaldson benefited from the apparently insatiable demand for power generation worldwide. Sales to this market jumped more than 80%.
In addition to a string of ROEs in the 20%-26% range that stretches back about 10 years, this staid 92-year-old Midwesterner has a tendency to surprise analysts. It has beaten analyst earnings estimates in each of the last four quarters.
It's particularly impressive how consistent Donaldson is on this measure, especially since it serves cyclical industries like construction equipment and aerospace. Just as impressively, Donaldson beats rivals Pall Corp (NYSE:PLL) and CLARCOR (NYSE:CLC), respectively, by making better use of its assets and using an appropriate amount of debt.
So, assuming the company passes your own additional due diligence, would now be the time for a Fool to buy? Not me. The company trades at a P/E of 24 and a PEG of 1.6. Although management is bullish on 2008, I'd wait to see whether the much-anticipated recession actually shows up and knocks prices down a bit.
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