Donaldson (DCI) Close to the Trough - Oppenheimer

Following weak reports from diesel engine and off-road equipment manufacturers, Oppenheimer analyst, Jim Giannakouros, analyzed the potential pressure points and resulting earnings risk to Donaldson Company (NYSE: DCI) ahead of its F3Q16 report on 6/2. He expects DCI to maintain the lower end of its FY16 EPS guidance of $1.51-1.61, in line with consensus. No change to Perform rating.

Engine - OE. Off-road pressures appear well-understood, with incremental softness in Ag & Mining, particularly in LatAm shrugged off by investors increasingly comfortable the company is closer to trough. On-road is a bit mixed given risks to Class 8 shipment projections (seasonally weaker orders may persist into 3Q given currently bloated inventory levels) vs. steadier Class 4-7 build rates.

Engine - AM. Given off-road end markets represent ~75% of DCI's Engine-AM sales, the analyst tweaks F3Q sales to -4% y/y (+8% q/q) from -2% y/y (+11% q/q), while independent AM likely proves more resilient given its leaner structure. Mixed on-road reads also drive conservatism but proprietary product AM retention suggest added resiliency, and Industrias Partmo adds 1-2% of growth in FY17.

Industrial Products. The anlayst reduced his IFS organic sales projection to -2% y/ y (from -1%) for FY16E as industrial capex remains subdued and latest PMI reads indicate US production declines are impacting near-term spending decisions. He also tweaked SAP organic revenue declines (-2% y/y from -1%) given continued HDD pressures. Further cost-out actions should support OM progression.

For an analyst ratings summary and ratings history on Donaldson Company click here. For more ratings news on Donaldson Company click here.

Shares of Donaldson Company closed at $32.92 yesterday.

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