Donaldson Exhibits Strong Prospects Despite Persisting Headwinds

Donaldson Company, Inc. DCI is benefiting from solid momentum across all its segments. The Mobile Solutions segment is gaining from higher volume in the aftermarket business, driven by positive market trends and the impact of expanded market share. The Industrial Solutions segment is riding on persistent strength in the aerospace and defense business. Robust momentum in commercial aerospace fueled by increased demand for new equipment, as well as solid demand in defense markets backed by the increased orders and porting activity, augurs well for the segment. Rising demand for disk drives and food & beverage products in Europe, the Middle East and Africa, and the Asia Pacific region is boosting the Life Sciences segment.

DCI has solidified its product portfolio and leveraged business opportunities through asset additions. It acquired a 49% minority stake in Medica S.p.A. in August 2024. The inclusion of Medica’s technology and expertise in filtration products enables the company to penetrate new markets and diversify its offerings in the medical device and water purification sectors. 

In June 2023, DCI acquired Univercells Technologies, expanding its growing offering in the life sciences industry. Univercells will be added to its Life Sciences segment. The company acquired Isolere Bio in February 2023. The Isolere buyout enabled Donaldson to create leading separation and filtration solutions for emerging genetically based drugs, and Isolere’s revenues are reported within the Donaldson Life Sciences segment.

The company’s shareholder-friendly policies are encouraging. Dividend payments totaled $64.6 million in the first six months of fiscal 2025 and $122.8 million in fiscal 2024. DCI bought back shares worth $81.6 million in the first six months of fiscal 2025 and $162.7 million in fiscal 2024. It is worth noting that its quarterly dividend was hiked 8% in May 2024. The company has raised its dividend for 28 consecutive years. In November 2023, its board of directors approved a new repurchase program, authorizing it to repurchase up to 12 million shares of its common stock. The new repurchase program replaced the previous one, which was approved in 2019.

The company, which belongs to the Pollution Control industry, currently carries a Zacks Rank #3 (Hold).

Headwinds Plaguing DCI

Donaldson has been witnessing weakness in the on-road and off-road businesses. Lower levels of global truck production owing to softness in industrial markets are affecting its on-road business. Weakness in agricultural markets and soft end-market demand globally are upsetting the off-road business. In the second quarter of fiscal 2025, the on-road and off-road business sales declined 24.4% and 12.8%, respectively, on a year-over-year basis. Management expects these weaknesses to persist in the near term and hurt the company’s performance.

DCI has been dealing with the adverse impacts of high selling, general and administrative expenses. Increasing headcount and incremental expenses associated with investments in acquired businesses are pushing up the selling, general and administrative expenses, which increased 1.5% to $159.2 million in the second quarter of fiscal 2025 and 5.7% to $636.7 million in fiscal 2024. The impact of these expenditures is evident in the rise of the selling, general and administrative expenses as a percentage of total revenues, which climbed 40 basis points to reach 18.3%. Also, the overall operating expenses increased 3.9% year over year to $369.2 million in the first six months of fiscal 2025 and 7.3% year over year to $730.3 million in fiscal 2024. The metric, as a percentage of total revenues, increased 30 basis points to 20.9%. For fiscal 2025, we expect continued pressure from rising selling, general and administrative expenses to partially dent the company’s bottom line.

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This article originally published on Zacks Investment Research (zacks.com).

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