What's Pushing Donaldson Toward Record Highs?

On Friday, Donaldson (DCI 2.00%) will release its latest quarterly results. The key to making smart investment decisions on stocks reporting earnings is to anticipate how they'll do before they announce results, leaving you fully prepared to respond quickly to whatever inevitable surprises arise. That way, you'll be less likely to make an uninformed knee-jerk reaction to news that turns out to be exactly the wrong move.

Donaldson is a mid-sized company that focuses on filtration systems and parts, with an emphasis on exhaust and emissions systems as well as air filtration for industrial use. That's far from a high-profile business, but the company has quietly produced impressive results in recent years. Let's take an early look at what's been happening with Donaldson over the past quarter and what we're likely to see in its quarterly report.

Stats on Donaldson

Source: Yahoo! Finance.

Will Donaldson keep pumping higher this quarter?
In recent months, analysts cut back on their views on Donaldson's earnings, reducing their earnings-per-share estimates for the just-finished quarter by $0.02 and making larger cuts in the $0.05-$0.07 range to their consensus figures for fiscal 2013 and 2014. The stock, though, has kept rising modestly, with about a 3% gain since early February.

You won't find filtration companies in the spotlight often, but the role that Donaldson and its peers play is critical for many industries. From on-road heavy trucks to off-road construction equipment, as well as military vehicles and aerospace, Donaldson's mission is to clean the air and liquids that make engines and other machinery run and then to treat the emissions that result from their use.

In order to find growth, Donaldson has evolved from being a North American-centered business to one that is diversified around the world. More than half of its sales now come from Europe and the Asia-Pacific region, and although European exposure has held back the company lately, Donaldson has found strong growth over the years from its global expansion.

Yet sluggish economic conditions have weighed on some of Donaldson's business segments. Back in March, the company said at a conference presentation that it expected sales of its engine segment to decline for the rest of fiscal 2013, but that gas-turbine business would expand enough to produce overall industrial sales growth of 1%-6%. Longer term, Donaldson expects to be a global giant in filtration, with its razor-and-blades model of providing replacement parts hopefully producing strong margins.

Donaldson faces two big risk factors. One comes from the fact that it counts Caterpillar (CAT 3.37%) as a major customer, with sales to the heavy-equipment maker accounting for slightly less than 10% of Donaldson's net sales over the past three fiscal years. Caterpillar has faced difficulties recently due to the drop in commodities prices affecting its mining-equipment business as well as general macroeconomic trends, and that could hurt Donaldson's business with the company.

The other comes from competitors. Cummins (CMI 4.59%) is a vertically integrated giant within the industry, offering filtration systems as part of its overall production of engines, and it has been a big innovator in the increasingly popular natural-gas-engine segment. Meanwhile, Pall (NYSE: PLL) also focuses on filtration systems, with a broad reach that includes everything from traditional industrial applications to its Oenoflow wine-filtering system.

In Donaldson's quarterly report, watch closely to see if the company is on track to meet its earlier projections for the fiscal year. On the whole, though, Donaldson's opportunity is a longer-term play on the growth of the industrial sector worldwide, and it will take a revival in the global economy for the company to maximize its profits in the long run.

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