Portfolio Manager Steve Lyons of Cooke & Bieler says Donaldson Company, Inc. (DCI) is a filtration company whose strength is in its technology and innovation.
“They only play in markets where their value proposition is valued by their customers. So they avoid markets like water filtration or light vehicle filtration. Instead, their filters typically protect high-value engines or assets where downtime and the cost of insufficient filtration far exceeds the cost of the filters,” Lyons says.
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Lyons sees attractive secular trends in the industry over the long term, which will benefit Donaldson Company.
“Any regulation that forces clean air emissions or higher fuel efficiencies, anything that increases complexity, is a positive for Donaldson,” Lyons says. “Similarly, increased usage of biodiesel and low-sulfur fuel along with fuel injection pressures that have increased fourfold over the past decade all require a higher-performing filter to prevent engine damage. All of this plays right into Donaldson’s expertise and position as a technology leader.”
Additionally, Donaldson should see a significant revenue opportunity for their aftermarket filters, Lyons says.
“More and more of the company’s business requires end users to use Donaldson’s proprietary aftermarket filters too, making it increasingly a razor and blade business. Importantly, they have been able to maintain their dominant market share with manufacturers while introducing this proprietary technology. With an aftermarket many times larger than the first-fit market, there exists a significant revenue opportunity for Donaldson,” Lyons adds.
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