In theory, filtration companies have a lot going for them. Growing regulatory requirements promulgated by environmental concerns should ensure GDP growth in the future. Moreover, the promise of long term growth from industrialization and increasing numbers of transport vehicles in emerging markets offers plenty of upside. On the other hand, they are still cyclical plays that are dependent on specific end markets. In this article I want to focus on Donaldson Company, Inc. (NYSE:DCI) and discuss some of the reads across to other companies from its recent results.
Donaldson Company, Inc. (NYSE:DCI) Disappoints
The market didn’t like the recent results, and they served as a salutary reminder that the industrial market still faces challenges this year. Sales were up 3%, but operating income declined 5%. In order to demonstrate the particulars with this company I’ve broken out some numbers below. The orange segments represent Industrial Products revenues, while the blue shows Engine Products revenues.
It’s not hard to see that its key end markets are construction and agricultural (aftermarket and off road) machinery, heavy trucks (on road), industrial filtration and gas turbine filters.
Here is how the relative segments have been trending in terms of quarterly revenues.
What the Industry is Saying
In order to assess its end markets it’s a good idea to go back to Alcoa Inc (NYSE:AA)’s recent results. There is a detailed outline of them here. The key thing to note here is that Alcoa Inc (NYSE:AA)’s predictions for its Heavy Truck and Trailer segment got progressively worse in 2012, and Europe and North America are set for declines in 2013. All growth prospects in the segment are expected to come from China.
Turning to gas turbines, Alcoa Inc (NYSE:AA) forecast 3%-5% growth for its industrial turbine sales, and it remains an area of strength. Gas Turbine revenues have been strong for Donaldson (up 79% in the quarter) on account of low gas prices causing electricity generators to run the turbines more. However, it is not all good news for Donaldson Company, Inc. (NYSE:DCI). For example, Joy Global Inc. (NYSE:JOY) is seeing ongoing weakness in its mining operations because low gas prices have reduced the demand for coal for electricity generation. Of course this is happening because gas prices have been low in the US and because growth has slowed in China. As such, Joy Global is facing ongoing challenges, and Donaldson Company, Inc. (NYSE:DCI) is talking about mining not picking up until later in 2013. Construction, mining and heavy trucking remain problematic sectors for Donaldson.