Thursday, KeyBanc Capital upgraded Clarcor Inc. (CLC) and Donaldson Company Inc. (DCI) shares to Hold from Underweight. The brokerage lowered its 2009 EPS estimate for CLC to $1.78 from $1.85.
Analyst Jeffrey Hammond attributed the upgrade of CLC and DCI shares based on valuation. The analyst remains cautious on Donaldson and Clarcor, as he believes investors have generally underestimated their sensitivity to the economic cycle. However, the analyst believes the risk/reward profile is appropriately balanced at current share price levels.
Given the sudden deterioration in equipment OEM in fourth quarter of calendar 2008, the analyst was not surprised by the weakness in Donaldson's Engine Products business in second quarter of 2009 (-11% organic), particularly given the company's above-average exposure to first-fit (OEM) applications (about 45% of Engine Products).
That said, the analyst believes that consensus expectations have been reset for fiscal 2009 in light of current conditions. However, the analyst believes Street estimates calling for a re-acceleration of earnings in fiscal 2010 (consensus $1.84) could prove optimistic, given the timing of Donaldson's fiscal year-end around any potential resurgence in the macro economy, exposure to later-cycle end markets and a difficult comparison from first quarter of 2009.
Clarcor shares have been under pressure amid production shutdowns by equipment OEMs and commentary from filtration peers, and the analyst believes these more muted expectations are now largely priced into the stock. The analyst lowered his fiscal 2009 estimate to $1.78 based on further weakness in OEM and off-road markets, as well as a likely deceleration in the company's PECO business.
The analyst noted that while peer-company read-through has broadly pointed to a more challenged environment, Clarcor's business mix would suggest that demand has held up modestly better. Specifically, while Donaldson's Engine Products Aftermarket business declined roughly 5% organically in second quarter of 2009, sales in the Americas grew modestly.
Given this dynamic, the analyst would not expect significant near-term earnings misses, and therefore does not see material downside to the stock near term.
Currently, CLC is down $0.50 or 1.93% and trading at $25.36. DCI is currently trading at $23.14, down $1.29 or 5.28%.
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