Donaldson (NYSE:DCI) Misses Q1 Revenue Estimates

Filtration equipment manufacturer Donaldson (NYSE: DCI) fell short of the market’s revenue expectations in Q1 CY2025 as sales only rose 1.3% year on year to $940.1 million. Its non-GAAP profit of $0.99 per share was 4.5% above analysts’ consensus estimates.

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“I am proud of our third quarter earnings results which are a testament to the durability of our business model and the strength of the Donaldson team,” said Tod Carpenter, chairman, president and CEO.

Company Overview

Playing a vital role in the historic Apollo 11 mission, Donaldson (NYSE: DCI) manufacturers and sells filtration equipment for various industries.

Sales Growth

A company’s long-term sales performance can indicate its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Regrettably, Donaldson’s sales grew at a mediocre 6.3% compounded annual growth rate over the last five years. This fell short of our benchmark for the industrials sector and is a rough starting point for our analysis.

We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Donaldson’s recent performance shows its demand has slowed as its annualized revenue growth of 2.9% over the last two years was below its five-year trend.

We can dig further into the company’s sales dynamics by analyzing its constant currency revenue, which excludes currency movements that are outside their control and not indicative of demand. Over the last two years, its constant currency sales averaged 3.1% year-on-year growth. Because this number aligns with its normal revenue growth, we can see that Donaldson has properly hedged its foreign currency exposure.

This quarter, Donaldson’s revenue grew by 1.3% year on year to $940.1 million, falling short of Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 2.4% over the next 12 months, similar to its two-year rate. This projection is underwhelming and suggests its newer products and services will not lead to better top-line performance yet.

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Operating Margin

Donaldson has been an efficient company over the last five years. It was one of the more profitable businesses in the industrials sector, boasting an average operating margin of 13.8%. This result isn’t too surprising as its gross margin gives it a favorable starting point.

Looking at the trend in its profitability, Donaldson’s operating margin might fluctuated slightly but has generally stayed the same over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

In Q1, Donaldson generated an operating margin profit margin of 9.3%, down 6.2 percentage points year on year. Since Donaldson’s operating margin decreased more than its gross margin, we can assume it was less efficient because expenses such as marketing, R&D, and administrative overhead increased.

Earnings Per Share

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Donaldson’s EPS grew at a solid 11.1% compounded annual growth rate over the last five years, higher than its 6.3% annualized revenue growth. However, this alone doesn’t tell us much about its business quality because its operating margin didn’t expand.

We can take a deeper look into Donaldson’s earnings to better understand the drivers of its performance. A five-year view shows that Donaldson has repurchased its stock, shrinking its share count by 5.8%. This tells us its EPS outperformed its revenue not because of increased operational efficiency but financial engineering, as buybacks boost per share earnings.

Like with revenue, we analyze EPS over a more recent period because it can provide insight into an emerging theme or development for the business.

For Donaldson, its two-year annual EPS growth of 7.6% was lower than its five-year trend. We hope its growth can accelerate in the future.

In Q1, Donaldson reported EPS at $0.99, up from $0.92 in the same quarter last year. This print beat analysts’ estimates by 4.5%. We also like to analyze expected EPS growth based on Wall Street analysts’ consensus projections, but there is insufficient data.

Key Takeaways from Donaldson’s Q1 Results

It was great to see Donaldson slightly lift its full-year EPS guidance. We were also happy its EPS and EBITDA topped analysts’ expectations. On the other hand, its constant currency revenue fell slightly short of Wall Street’s estimates. Zooming out, we think this was a mixed quarter. The stock remained flat at $68.90 immediately after reporting.

Is Donaldson an attractive investment opportunity at the current price? The latest quarter does matter, but not nearly as much as longer-term fundamentals and valuation, when deciding if the stock is a buy. We cover that in our actionable full research report which you can read here, it’s free.