Donaldson Looks to Spur Profitable Growth Through New Life Sciences Segment

Narrow-moat Donaldson DCI posted 3% sales growth year over year, despite currency headwinds of 4%, and achieved the highest quarterly operating margin in six years. Favorable pricing and input cost stabilization allowed adjusted operating margin to expand 330 basis points year over year. We reiterate our $59 fair value estimate as our long-term outlook for Donaldson is unchanged.

During the quarter, mobile solutions, industrial solutions, and life sciences grew reported revenue 2%, 13%, and negative 16% year over year, respectively. Segment earnings before taxes margin improved by 360 basis points year over year within mobile solutions and 640 basis points within industrial solutions as both segments benefited from pricing and the stabilization of input costs. However, life sciences segment margin decreased 1,310 basis points as lower volume for high-margin disk drive solutions and incremental investment to grow and scale recent acquisitions weighed on the segment.

Management narrowly increased the midpoint of fiscal 2023 sales growth guidance from 3% to 4% while leaving the midpoint of the operating margin guidance unchanged at 14.8%. Management anticipates consolidated sales growth will be driven by 3% growth within mobile, 10% within industrial, and negative 7% within life sciences (all at midpoint).

Life sciences looks to be of increasing importance to the company as it has now acquired a third company targeting the industry with the purchase of Isolere Bio for $63 million last month. We note that the lackluster growth within the life sciences segment this quarter was driven by disk drive solutions—a mature but high-margin offering. However, we expect the company to drive future growth within the segment through newer solutions such as food and beverage offerings, which grew 20% year over year. Importantly, management mentioned that it plans to provide further details for the segment’s strategy during an investor day on April 4.