Donaldson Company, Inc. DCI stands to gain from the diversified business structure that enables it to mitigate the adverse impacts of weakness in one end market with strength across others. The company has a presence in several end markets, including mining, construction, agriculture, food & beverage, aerospace & defense and transportation. Also, its robust product portfolio, consisting of replacement filters for air and liquid filtration applications, dust, fume and mist collectors; compressed air and industrial gasses purification systems; hydraulic and lubricated rotating equipment applications; and liquid filtration for industrial processes, augurs well for the company’s short-term stability and long-term growth.

The strong performance of the Mobile Solutions, Industrial Solutions and Life Sciences segments is aiding DCI. The Mobile Solutions segment is benefiting from higher volume in the aftermarket business, driven by positive market trends, the impact of inventory reductions and expanded market share. 

The Industrial Solutions segment is supported by persistent strength in the aerospace and defense business. Robust momentum in the commercial aerospace and rotorcraft markets, as well as solid demand in defense markets due to the modernization of equipment and the impact of global conflicts, augurs well for the segment. Also, strength in the dust collection, industrial hydraulics and industrial gases verticals within the industrial filtration solutions business is expected to aid the segment in the near term. An increase in demand for disk drives and food & beverage products in the Europe, Middle East and Africa, and Asia Pacific region is boosting the Life Sciences segment.

Acquisitions have been Donaldson's preferred mode of business expansion to date. In August 2024, the company completed the acquisition of a 49% minority stake in Medica S.p.A. The inclusion of Medica’s technology and expertise in filtration products will enable it to penetrate new markets and diversify its offerings in the medical device and water purification sectors. 

In June 2023, the company acquired Univercells Technologies, expanding its growing offering in the life sciences industry. Univercells will be added to the 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 genetic-based drugs and Isolere’s revenues are reported within the Life Sciences segment.

Donaldson’s commitment to rewarding its shareholders through dividends and share buybacks is encouraging. Dividend payments totaled $32.4 million in the first three months of fiscal 2025 (ended October 2024). The company bought back shares worth $74.4 million in the first three months of fiscal 2025. 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 the past year, this Zacks Rank #3 (Hold) company’s shares have gained 5.9%.

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Headwinds Plaguing DCI

Donaldson has been witnessing weakness in the on-road and off-road businesses. Lower levels of equipment production owing to softness in the industrial markets, particularly in the United States and China, are affecting the company's on-road business. Weakness in the agriculture markets and soft end-market demand globally are upsetting the off-road business.

The company 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 7.2% to $166.1 million in the first quarter of fiscal 2025. 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 20 basis points to reach 18.5%. Also, the overall operating expenses increased 7.1% year over year to $188.8 million in the first three months of fiscal 2025.

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