Donaldson versus Tetra Tech: What Investors Need to Know
Zacks Equity Research
Updated
The Zacks Categorized Pollution Control industry’s rank has trended up sharply in the past week. Currently, it holds a Zacks Industry Rank of 101 (among more than 256 industries) which is a massive improvement over the 200th rank it held last week. Two leading companies operating within the sector, Donaldson Company, Inc. DCI and Tetra Tech, Inc. TTEK have caught our attention today. Read on for a comparative analysis to find out which of them offers a more attractive proposition for investors right now.
Starting with recent share price performance, Donaldson has charted an impressive growth trajectory over the past six months, gaining 22.6%. In contrast, Tetra Tech has returned only half that. To put things in perspective, while Donaldson strongly outperformed the Zacks Categorized Pollution Control Equipment and Services industry average return of 9.7% over the same time frame, Tetra Tech barely managed to graze it at a return of 11.2%.
The Growth Drivers
Delving into the growth drivers, Donaldson has been benefitting of late from stabilization in its end markets. Positive effects of restocking, favorable commodity prices, decent rig counts and stable industrial production are some of the tailwinds for its growth. Restocking has been helping in the Original Equipment business and growing rig count is proving conducive to independent channel business. Based on these positive trends, the company raised both its top and bottom-line guidance for fiscal 2017, concurrent with the fiscal second-quarter 2017 results.
Donaldson now expects year-over-year fiscal 2017 sales growth in the band of 2–4%, as against the previously guided range of a 2% decline to a 2% increase. In terms of segments, Donaldson estimates Engine Products sales rise of 5–7% year over year, on the back of robust performance of Aftermarket, Off-Road, and Aerospace and Defense end markets. We are highly optimistic about Donaldson’s growth prospects in light of these positive trends.
Tetra Tech has several growth drivers in place as well. The company’s focus on high-end consulting and engineering services continues to boost its high value and high margin businesses. For fiscal 2017, Tetra Tech remains bullish about its growth across all four client sectors namely, U.S. federal, U.S. state and local, the U.S. commercial work, and finally, international. The company’s U.S. state and local clients—in both the municipal water and smart water services domains—are expected to be its strongest growth drivers for the upcoming quarters.
Based on this scenario, Tetra Tech projects growth rates to lie within 7%–12% during 2017. Also, it foresees the U.S. federal work to be about a quarter of the overall business and grow at a rate of 5%–10% for the year. The company believes that the solid pipeline of projects in the Department of Defense and development-related services, in both the U.S. and overseas, will continue to propel growth of its federal business.
Zacks Rank
So far so good, but when it comes to Zacks Rank, which is designed to predict price performance relative to the market over the next one to three months, Donaldson comes across as a better wager. This is because the company carries a Zacks Rank #2 (Buy) compared to Tetra Tech’s Zacks Rank #3 (Hold). This implies that while Donaldson is expected to outperform the broader market, Tetra Tech is likely to perform in line over the next few months.
Earnings Performance
Coming next, the earnings performance of both the companies looks relatively decent. Both Donaldson and Tetra Tech have a positive average earnings surprise of 5.9% and 3.2%, respectively. While Donaldson has scored three beats, Tetra Tech has two beats to its credit over the trailing four quarters. Donaldson has also been witnessing solid activity on the earnings estimate revision front.
Brokers Consensus
Analysts have become increasingly bullish on Donaldson over the past month, as the company’s Zacks Consensus Estimate for fiscal 2017 earnings has trended up over the same time frame, going from $1.60 to $1.65 per share. On the other hand, brokers chose to remain on the sidelines for Tetra Tech in the recent past, as its earnings estimates have remained steady at $2.18 over the past 30 days.
Based on its favorable business trends and analyst optimism, we believe that Donaldson is a better bet than Tetra Tech for an investor scouting an entry position in this industry.
Other Stocks to Consider
Some other stocks in the broader sector include Barnes Group, Inc. B and Altra Industrial Motion Corp. AIMC. Both stocks carry the same Zacks Rank as Donaldson. You can see the complete list of today’s Zacks #1 Rank stocks here.
Barnes Group has a solid earnings surprise history for the trailing four quarters, having beaten estimates thrice, for an average beat of 4.4%.
Altra Industrial has a positive earnings surprise history, with an average of 12.5% for the trailing four quarters, beating estimates all through.
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