Thinking about what to do with Donaldson Company stock? You are not alone. Whether you have been holding shares, watching from the sidelines, or just now considering a move, Donaldson’s recent price action probably has your attention. Over the last year, the stock climbed 14.8%, continuing a growth pattern that has delivered a strong 22.9% rise so far this year. Zoom out further and those appreciating the power of compounding returns will note the impressive 68.6% gain over three years and 75.9% over the last five. Even on a shorter horizon, Donaldson outpaced many peers by rising 3.3% this week and 3.8% over the past month.

Some of these moves are being fueled by well-received market developments, such as recent optimism around industrial demand and supply chain improvements. As investors try to make sense of whether this momentum still has runway, valuation becomes a central question. According to a recent assessment using six undervaluation checks, Donaldson earned a value score of just 2, meaning it is considered undervalued in only two areas. Of course, those numbers only tell part of the story.

Up next, let’s dig into the individual valuation methods analysts often use to size up a company like Donaldson. Stay tuned, because we will get to an even better lens for understanding value in today’s market before we wrap up.

Donaldson Company scores just 2/6 on our valuation checks. See what other red flags we found in the full valuation breakdown.

The Discounted Cash Flow (DCF) model estimates a company’s worth by projecting its future cash flows and discounting them back to today’s value. It answers a simple, but powerful, question: what is Donaldson Company’s stock worth based on estimates of how much cash it will generate in the years ahead?

Currently, Donaldson Company generates $321.3 million in free cash flow. Analyst forecasts expect this figure to steadily grow over the coming decade, projecting free cash flow to reach $708.3 million by 2035. The first five years of projections are analyst-driven, while later years are based on extended extrapolations. This approach allows for a longer-horizon look at value. All figures are in US dollars, and the model used here is the 2-Stage Free Cash Flow to Equity method.

Basing the calculation on these projections, the DCF model arrives at a fair value of $89.01 per share. Compared to the current market price, this suggests Donaldson Company is approximately 7.1% undervalued. While not a huge discount, it does tilt the assessment in favor of value-seeking investors looking for a solid industrial pick.

Result: ABOUT RIGHT

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for Donaldson Company.

Simply Wall St performs a valuation analysis on every stock in the world every day (check out Donaldson Company's valuation analysis). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes.

For profitable companies like Donaldson, the Price-to-Earnings (PE) ratio is a widely used valuation metric because it directly relates a company’s stock price to its earnings, making it especially meaningful when profits are steady and predictable. The “right” PE multiple isn’t just about the company’s current profits; it also reflects investor expectations for future growth, as well as the risks involved. Higher growth and lower perceived risks generally justify a higher PE, while slower growth or greater uncertainty push it lower.

Donaldson Company currently trades at a PE ratio of 26.1x. When stacked up against the Machinery industry average of 24.3x and peer average of 33.7x, Donaldson sits slightly above the industry but below where some peers are valued. However, just comparing to industry averages or peers can miss nuances unique to each business. That is where Simply Wall St’s “Fair Ratio” comes in, offering a more tailored benchmark by weighing earnings growth expectations, profit margins, company size, and risk profile.

Donaldson’s Fair Ratio is calculated at 20.5x. This suggests the stock is being valued at a premium to what would normally be expected for a business with its particular mix of growth, risk, and financial characteristics. While there is no absolute rule, a PE meaningfully above the Fair Ratio can point to overvaluation. In this case, Donaldson’s actual PE is 5.6x above the Fair Ratio, indicating the stock could be a bit on the expensive side compared to its fundamentals.

Result: OVERVALUED

PE ratios tell one story, but what if the real opportunity lies elsewhere? Discover companies where insiders are betting big on explosive growth.

Earlier we mentioned that there is an even better way to understand valuation, so let’s introduce you to Narratives. A Narrative is simply the story you believe about a company: how it will grow, face risks, and create value. You connect this story directly to your own assumptions about its future revenue, earnings, profit margins, and ultimately what you think is a fair share price. Narratives turn investment decisions from just number crunching into intuitive, accessible forecasts grounded in real business trends. They are a core feature of Simply Wall St’s Community page, where millions of investors regularly share and update their views.

By building a Narrative, you link a company’s story, such as expectations for regulatory-driven demand, innovation, or operational risks, to a live financial forecast, which then calculates your personal view of fair value. Narratives make it easy to compare your fair value to the current share price, helping you decide whether to buy, hold, or sell. They are automatically updated as new news or earnings are released so you are always working with the latest information.

For Donaldson Company, for example, one user might see regulatory changes as a springboard for ongoing double-digit growth, leading to a fair value above $80 per share. Another user may focus on legacy product risks and assign a much lower fair value, so your Narrative really does drive your own unique investment decision.

Do you think there's more to the story for Donaldson Company? Create your own Narrative to let the Community know!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Companies discussed in this article include DCI.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com