Donaldson (DCI)

Filtration equipment manufacturer Donaldson (NYSE:DCI) reported revenue ahead of Wall Streets expectations in Q3 CY2025, with sales up 3.9% year on year to $935.4 million. Its non-GAAP profit of $0.94 per share was 1.8% above analysts’ consensus estimates.

Company Overview

Playing a vital role in the historic Apollo 11 mission, Donaldson (NYSE:DCI) manufacturers and sells filtration equipment for various industries.

Gas and liquid handling companies possess the technical know-how and specialized equipment to handle valuable (and sometimes dangerous) substances. Lately, water conservation and carbon capture–which requires hydrogen and other gasses as well as specialized infrastructure–have been trending up, creating new demand for products such as filters, pumps, and valves. On the other hand, gas and liquid handling companies are at the whim of economic cycles. Consumer spending and interest rates, for example, can greatly impact the industrial production that drives demand for these companies’ offerings.

Competitors offering similar products include Parker-Hannifin (NYSE:PH), Pall (NYSE:PLL), and Cummins (NYSE:CMI).

A company’s long-term performance is an indicator of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Thankfully, Donaldson’s 7.9% annualized revenue growth over the last five years was decent. Its growth was slightly above the average industrials company and shows its offerings resonate with customers.

We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade 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.

Donaldson also reports organic revenue, which strips out one-time events like acquisitions and currency fluctuations that don’t accurately reflect its fundamentals. Over the last two years, Donaldson’s organic revenue averaged 4% year-on-year growth. Because this number aligns with its two-year revenue growth, we can see the company’s core operations (not acquisitions and divestitures) drove most of its results.

This quarter, Donaldson reported modest year-on-year revenue growth of 3.9% but beat Wall Street’s estimates by 1.3%.

Looking ahead, sell-side analysts expect revenue to grow 3.4% over the next 12 months, similar to its two-year rate. This projection is underwhelming and suggests its newer products and services will not catalyze better top-line performance yet.

Donaldson’s gross margin is good compared to other industrials businesses and signals it sells differentiated products, not commodities. As you can see below, it averaged an impressive 34.3% gross margin over the last five years. That means for every $100 in revenue, roughly $34.29 was left to spend on selling, marketing, R&D, and general administrative overhead.

Donaldson’s gross profit margin came in at 35.2% this quarter, in line with the same quarter last year. On a wider time horizon, the company’s full-year margin has remained steady over the past four quarters, suggesting its input costs (such as raw materials and manufacturing expenses) have been stable and it isn’t under pressure to lower prices.

Donaldson’s operating margin might fluctuated slightly over the last 12 months but has remained more or less the same, averaging 14% over the last five years. This profitability was top-notch for an industrials business, showing it’s an well-run company with an efficient cost structure. This result isn’t too surprising as its gross margin gives it a favorable starting point.

Analyzing the trend in its profitability, Donaldson’s operating margin might fluctuated slightly but has generally stayed the same over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

This quarter, Donaldson generated an operating margin profit margin of 16%, up 1.4 percentage points year on year. The increase was encouraging, and because its operating margin rose more than its gross margin, we can infer it was more efficient with expenses such as marketing, R&D, and administrative overhead.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Donaldson’s EPS grew at a remarkable 13.9% compounded annual growth rate over the last five years, higher than its 7.9% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

We can take a deeper look into Donaldson’s earnings quality to better understand the drivers of its performance. A five-year view shows that Donaldson has repurchased its stock, shrinking its share count by 8%. This tells us its EPS outperformed its revenue not because of increased operational efficiency but financial engineering, as buybacks boost per share earnings.

Like with revenue, we analyze EPS over a more recent period because it can provide insight into an emerging theme or development for the business.

For Donaldson, its two-year annual EPS growth of 11.7% was lower than its five-year trend. We still think its growth was good and hope it can accelerate in the future.

In Q3, Donaldson reported adjusted EPS of $0.94, up from $0.83 in the same quarter last year. This print beat analysts’ estimates by 1.8%. We also like to analyze expected EPS growth based on Wall Street analysts’ consensus projections, but there is insufficient data.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Donaldson has shown robust cash profitability, enabling it to comfortably ride out cyclical downturns while investing in plenty of new offerings and returning capital to investors. The company’s free cash flow margin averaged 9.8% over the last five years, quite impressive for an industrials business.

Taking a step back, we can see that Donaldson’s margin expanded by 2.2 percentage points during that time. This shows the company is heading in the right direction, and we can see it became a less capital-intensive business because its free cash flow profitability rose while its operating profitability was flat.

Donaldson’s free cash flow clocked in at $111.2 million in Q3, equivalent to a 11.9% margin. This result was good as its margin was 6.6 percentage points higher than in the same quarter last year, building on its favorable historical trend.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Although Donaldson hasn’t been the highest-quality company lately, it found a few growth initiatives in the past that worked out wonderfully. Its five-year average ROIC was 21.7%, splendid for an industrials business.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Uneventfully, Donaldson’s ROIC has stayed the same over the last few years. Given the company’s underwhelming financial performance in other areas, we’d like to see its returns improve before recommending the stock.

Donaldson reported $210.7 million of cash and $680.5 million of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $710.8 million of EBITDA over the last 12 months, we view Donaldson’s 0.7× net-debt-to-EBITDA ratio as safe. We also see its $11.6 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

It was good to see Donaldson narrowly top analysts’ revenue expectations this quarter. We were also happy its EBITDA narrowly outperformed Wall Street’s estimates. Overall, this print had some key positives. The stock traded up 2.7% to $90 immediately after reporting.

Updated: December 4, 2025 at 10:16 PM EST

We think that the latest earnings result is only one piece of the bigger puzzle. If you’re deciding whether to own Donaldson, you should also grasp the company’s longer-term business quality and valuation.

Donaldson isn’t a bad business, but we’re not clamoring to buy it here and now. To kick things off, its revenue growth was decent over the last five years. And while Donaldson’s organic revenue growth has disappointed, its stellar ROIC suggests it has been a well-run company historically.

Donaldson’s EV-to-EBITDA ratio based on the next 12 months is 18.2x. This valuation multiple is fair, but we don’t have much faith in the company. We're pretty confident there are superior stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $87 on the company (compared to the current share price of $93.73).