Filtration equipment manufacturer Donaldson (NYSE:DCI) met Wall Street’s revenue expectations in Q4 CY2025, with sales up 3% year on year to $896.3 million. Its non-GAAP profit of $0.83 per share was 6.6% below analysts’ consensus estimates.

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Revenue: $896.3 million vs analyst estimates of $897.9 million (3% year-on-year growth, in line)

Adjusted EPS: $0.83 vs analyst expectations of $0.89 (6.6% miss)

Adjusted EBITDA: $155.5 million vs analyst estimates of $167.6 million (17.3% margin, 7.2% miss)

Management lowered its full-year Adjusted EPS guidance to $3.97 at the midpoint, a 1.5% decrease

Operating Margin: 13.2%, down from 14.4% in the same quarter last year

Free Cash Flow Margin: 2%, down from 8.2% in the same quarter last year

Constant Currency Revenue was flat year on year, in line with the same quarter last year

Organic Revenue rose 3% year on year

Market Capitalization: $12.04 billion

“This quarter, the Donaldson team delivered record sales, strengthened the foundation to meet strong customer demand in key, high-margin businesses and made further progress on our footprint optimization initiatives, despite near-term challenges,” said Tod Carpenter, chairman, president and chief executive officer.

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

A company’s long-term sales performance is one signal of its overall quality. Any business can have short-term success, but a top-tier one grows for years. Luckily, Donaldson’s sales grew at a decent 7.9% compounded annual growth rate over the last five years. Its growth was slightly above the average industrials company and shows its offerings resonate with customers.

Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Donaldson’s recent performance shows its demand has slowed as its annualized revenue growth of 3.9% over the last two years was below its five-year trend. We’re wary when companies in the sector see decelerations in revenue growth, as it could signal changing consumer tastes aided by low switching costs.

We can better understand the company’s sales dynamics by analyzing its constant currency revenue, which excludes currency movements that are outside their control and not indicative of demand. Over the last two years, its constant currency sales averaged 3.5% year-on-year growth. Because this number aligns with its normal revenue growth, we can see that Donaldson has properly hedged its foreign currency exposure.

This quarter, Donaldson grew its revenue by 3% year on year, and its $896.3 million of revenue was in line with Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 4.3% over the next 12 months, similar to its two-year rate. This projection doesn't excite us and implies its newer products and services will not lead to better top-line performance yet.

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Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Donaldson’s operating margin might fluctuated slightly over the last 12 months but has remained more or less the same, averaging 14.1% 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.

Looking at 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.

In Q4, Donaldson generated an operating margin profit margin of 13.2%, down 1.2 percentage points year on year. Since Donaldson’s gross margin decreased more than its operating margin, we can assume its recent inefficiencies were driven more by weaker leverage on its cost of sales rather than increased marketing, R&D, and administrative overhead expenses.

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 13.6% 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 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 10.6% was lower than its five-year trend. We still think its growth was good and hope it can accelerate in the future.

In Q4, Donaldson reported adjusted EPS of $0.83, in line with the same quarter last year. This print missed analysts’ estimates, but we care more about long-term adjusted EPS growth than short-term movements. We also like to analyze expected EPS growth based on Wall Street analysts’ consensus projections, but there is insufficient data.

We struggled to find many positives in these results. Its EBITDA missed and its EPS fell short of Wall Street’s estimates. To add insult to injury, the company lowered full-year EPS guidance. Overall, this was a softer quarter. The stock traded down 9% to $95.00 immediately after reporting.

Donaldson underperformed this quarter, but does that create an opportunity to invest right now? When making that decision, it’s important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it’s free.