Donaldson has had an impressive run over the past six months as its shares have beaten the S&P 500 by 18.4%. The stock now trades at $92.14, marking a 32% gain. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is now the time to buy Donaldson, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free for active Edge members.
Why Is Donaldson Not Exciting?
We’re glad investors have benefited from the price increase, but we're swiping left on Donaldson for now. Here are three reasons why DCI doesn't excite us and a stock we'd rather own.
1. Lackluster Revenue Growth
We at StockStory place the most emphasis on long-term growth, but within industrials, a stretched 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 4.2% over the last two years was below its five-year trend. 
2. Weak Constant Currency Growth Points to Soft Demand
We can better understand Gas and Liquid Handling companies by analyzing their constant currency revenue. This metric excludes currency movements, which are outside of Donaldson’s control and are not indicative of underlying demand.
Over the last two years, Donaldson’s constant currency revenue averaged 4.2% year-on-year growth. This performance was underwhelming and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability. 
3. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Donaldson’s revenue to rise by 3.7%, close to its 7.9% annualized growth for the past five years. This projection is underwhelming and indicates its newer products and services will not catalyze better top-line performance yet.
Final Judgment
Donaldson isn’t a terrible business, but it isn’t one of our picks. With its shares beating the market recently, the stock trades at 18.7× forward EV-to-EBITDA (or $92.14 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We're fairly confident there are better stocks to buy right now. We’d recommend looking at an all-weather company that owns household favorite Taco Bell.
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