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Calgon Carbon Corporation (CCC), Pall Corporation (PLL), Donaldson Company, Inc. (DCI): Filtration Systems Industry, 3 Companies Explained

As production processes become more specific, the use of quality filtration systems becomes a necessity. Game-changing technologies in electronics, biotechnology, medical and pharmaceutical industries use various filtration products, which is boosting revenues for its producers. In addition, the increase in environmental regulations makes it hard for clients to curb their spending in these systems, realizing high growth potential.

Pall Corporation (NYSE:PLL)

Let’s see how three filtration system producers are performing.

Currency exposure offsetting good performance
Calgon Carbon Corporation (NYSE:CCC)
manufactures, reactivates, and applies activated carbon, ultraviolet light disinfection, ballast water treatment, and advanced ion-exchange technologies.

The company presented a mixed first-quarter. Earnings per share were $0.18, a 29% increase year-over-year. Profit reached $9.8 million, up 27%. However, the top line was damaged by unfavorable currency translations.

Calgon Carbon Corporation (NYSE:CCC)’s cost reduction and pricing actions are expected to boost revenues. Its cost improvement program will offer savings in raw material costs, consolidation of operations and headcount reductions. Phase 1 has already been completed, saving $10 million per year, and with the same target, phase 2 is already making notable progress.

The company understands that it needs to balance its requirements for future investments with its responsibility for short-term returns. Its acquisition of Calgon Carbon Japan KK in 2011 reinforced the company’s position in the second largest carbon consuming market in the world. Moreover, through its Hyde Marine acquisition, the company entered the ballast water treatment market. This exciting legislative-driven market has great long-term growth potential.

Calgon Carbon is making big efforts to become a leader in mercury removal, which is expected to turn the largest market for activated carbon in the U.S. Its recent development, the FLUEPAC brominated powdered activated carbon product line is securing 2-year $20-plus million contracts with coal-fired power plants in the Midwest.

However, I remain cautious about the economic challenges that the company might face in the future, especially currency headwinds and a weakness in its equipment business’ performance. This business unit is subject to long project life cycles from bid solicitation until completion. Sales are dependent on the health of the economy, which make them volatile. Access to bituminous coal is becoming more costly and complicated as well, due to its current high demand.

Weak economy forcing cost reductions
Pall Corporation (NYSE:PLL)
produces and supplies filtration, separation and purification products.

Weak macroeconomic conditions impacted on the company’s third quarter and are expected to continue for the rest of the year. Total revenue declined 2.5% year over year, reaching $641.2 million. Sales for the life sciences segment were up 5% offset by industrial segment sales, which were down 5%. On the other hand, its aerospace segment is showing benefits from the emerging markets.

The company is executing cost reduction initiatives in order to mitigate its industrial segment impact and improve its performance. This segment explains almost 50% of Pall’s revenues, so I support these plans.

Pall Corporation (NYSE:PLL)’s long sales cycles do not provide certainty in terms of predictable revenue streams. Unfortunately, the company is also exposed to currency headwinds, due to its geographic diversification.

Low performance this quarter despite solid fundamentals
Donaldson Company, Inc. (NYSE:DCI)
produces air and liquid filtration systems as well as exhaust and emission control products.

The company announced a 4% YoY decrease in net sales for its third quarter 2013. Operating income had no variation and net earnings were $70 million, a 2% down from the prior-year’s quarter. Management argues that the global economic environment is the main reason for Donaldson’s poor performance this quarter. Its engine products’ OEM businesses in the US and Japan were heavily impacted. However, the company showed solid sales growth in the emerging markets, especially in LatAm, South Africa, and India.

Donaldson Company, Inc. (NYSE:DCI) sells directly to OEMs and to aftermarket distributors. This helps the company build strong relationship with clients and produce premium-priced specific products for them, securing higher profit margins. Switching to a competitor is difficult for clients, since it involves changes in design and high expenses.

The company is shortening its product life cycle to three years in order to avoid copies from its peers. By renewing its supply and making old models obsolete, Donaldson Company, Inc. (NYSE:DCI) products lead the technology curve and avoid competition. The engineering and high reputation make this company’s products consistent and reliable. Donaldson Company, Inc. (NYSE:DCI) is well-positioned to provide good returns as a long term investment.

However, Donaldson is exposed to cyclical markets since its products are consumed during both manufacturing and transportation. Investors should pay special attention to these factors.

Bottom line

I believe Calgon Carbon Corporation (NYSE:CCC) will continue facing higher costs and currency headwinds due to coal’s current high demand and weak yen. This will affect the company’s profits in the near and mid-term.

I would not buy Pall Corporation (NYSE:PLL) for the short term. The company is highly exposed to uncertain global market conditions and currency headwinds.

Donaldson is an excellent choice for long term investing. Its narrow but steady economic moat and continuous innovation make it a good investment.

Louie Grint has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

The article Filtration Systems Industry: 3 Companies Explained originally appeared on Fool.com.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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