Time To Buy This Cyclical Company? – Donaldson Company, Inc. (DCI), Alcoa Inc (AA)

Caterpillar Inc. (NYSE:CAT) is a major customer of Donaldson Company, Inc. (NYSE:DCI) and is exposed to many of the same end markets. The fact that its EPS forecasts have been lowered over the last few months should have presaged the negative commentary from Donaldson on construction and mining. Much of CAT’s future growth depends on China, and Donaldson Company, Inc. (NYSE:DCI) remarking that CAT was still reducing inventory in China (primarily because of weakness in construction) is not a great sign, even as others are predicting better days in China.

Indeed, just as Alcoa Inc (NYSE:AA) predicted, demand from construction and mining OEM manufacturers has weakened in Asia and the Americas. This is a consequence of lower end demand, and it will take time for this to filter through.

Where Next For Donaldson?

The bullish case for Donaldson is dependent on conditions getting better in China and specifically within mining, construction and the heavy trucking industries. The market has been keen on this idea, but I think the information discussed above gives enough clues as to what to look for. If China’s construction industry is picking up you will see this in Caterpillar and Joy Global’s numbers before you see it with Donaldson. Similarly, Alcoa gives key guidance over many of its end markets, and my sense is this there isn’t enough hard evidence to get too excited yet.

Granted, China has the financial muscle to buy 7%-8% growth this year, but it is far from clear whether it will go towards the same kind of stimulus spending that it undertook in 2008. For now Donaldson Company, Inc. (NYSE:DCI) is talking of reduced visibility and lowering its full year outlook. It’s probably not the time to pile in, but rather monitor what its peer group is saying first.

The article Time To Buy This Cyclical Company? originally appeared on Fool.com and is written by Lee Samaha.

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