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URL:  http://boards.fool.com/donaldson-breathes-easy-19935173.aspx

Subject:  Donaldson Breathes Easy Date:  12/2/2003  4:26 PM
Author:  TMFTwitty Number:  32 of 37

http://www.fool.com/News/mft/2003/mft03120212.htm?ref=btp

Donaldson Breathes Easy

Global filtration giant Donaldson (NYSE: DCI) came through as expected after the bell yesterday, reporting a 12% jump in first-quarter earnings and a 9% pop in sales. But after 14 straight years of double-digit earnings growth, has the market come to expect too much from this consistent performer?

For the balance of the year, management is calling for "low double-digit growth" in most of its filtration businesses, except for gas turbine sales. The company has grown earnings an average of 12% annually for the past five years, and Wall Street is projecting similar growth for the next five.

The company appears on track for meeting growth targets because it could stand to gain on two fronts. As the U.S. economy heats up and also as the terrorism threat continues, Donaldson will benefit from its highly specialized niche in air, liquid, and sound filter systems. Its leadership role in the environmental security business took center stage a few weeks ago, for example, when it announced a $14 million sale of dust collection units for use at postal centers throughout the U.S.

The stock has had a great run -- delivering a whopping 65% year-to-date gain versus the S&P's 21% -- but a danger may be that the positive outlook is already baked into the cake. With a price-to-earnings ratio of 28, shares are trading at the highest end of their valuation range in the past five years. Yes, the company is highly profitable and has given stockholders a good rate of return, but the stock could become vulnerable if the market begins to perceive it as richly valued.

For Foolish investors in the market for the long haul, Donaldson appears to be a solid company with room to grow. But the stock is not cheap at this point, and investors might want to wait for a better price. Over time, this filter manufacturer could continue yielding above-average returns, while allowing stockholders to breathe easily -- knowing their investment is relatively secure.

Carla Pasternak welcomes your feedback at cpasternak@mtroyal.ab.ca
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