Donaldson Co Stock Shows Every Sign Of Being Modestly Overvalued

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GF Value
Apr 13, 2021
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The stock of Donaldson Co (NYSE:DCI, 30-year Financials) shows every sign of being modestly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $60.01 per share and the market cap of $7.6 billion, Donaldson Co stock is believed to be modestly overvalued. GF Value for Donaldson Co is shown in the chart below.

Donaldson Co GF Value Chart

Because Donaldson Co is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which averaged 4.4% over the past three years and is estimated to grow 1.38% annually over the next three to five years.

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Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. Donaldson Co has a cash-to-debt ratio of 0.40, which is worse than 72% of the companies in Industrial Products industry. GuruFocus ranks the overall financial strength of Donaldson Co at 7 out of 10, which indicates that the financial strength of Donaldson Co is fair. This is the debt and cash of Donaldson Co over the past years:

debt and cash

It is less risky to invest in profitable companies, especially those with consistent profitability over long term. A company with high profit margins is usually a safer investment than those with low profit margins. Donaldson Co has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $2.6 billion and earnings of $1.92 a share. Its operating margin is 12.89%, which ranks better than 79% of the companies in Industrial Products industry. Overall, the profitability of Donaldson Co is ranked 9 out of 10, which indicates strong profitability. This is the revenue and net income of Donaldson Co over the past years:

Revnue and Net Income

Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Donaldson Co is 4.4%, which ranks in the middle range of the companies in Industrial Products industry. The 3-year average EBITDA growth rate is 3.4%, which ranks in the middle range of the companies in Industrial Products industry.

Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Donaldson Co's ROIC was 14.10, while its WACC came in at 9.04. The historical ROIC vs WACC comparison of Donaldson Co is shown below:

ROIC vs WACC

To conclude, the stock of Donaldson Co (NYSE:DCI, 30-year Financials) gives every indication of being modestly overvalued. The company's financial condition is fair and its profitability is strong. Its growth ranks in the middle range of the companies in Industrial Products industry. To learn more about Donaldson Co stock, you can check out its 30-year Financials here.

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