Industrial filtration is one of those "stealth growth" markets that gets little attention, but offers investors a good play on diverse themes like pollution control, energy efficiency and OEM equipment growth. Recently, though, it has started to look as though this sector has some issues to resolve. Like Donaldson (NYSE:DCI), Clarcor (NYSE:CLC) is not looking at a disastrous operating environment, but it looks like investors have to lower their expectations a little for the time being.
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Disappointing Third Quarter Results
Bucking the "beat and raise" trend that is still prevalent in the industrial sector, Clarcor actually missed its estimates for the quarter. Sales rose 8%, with double-digit growth in the industrial/environmental segment and solid results in engine/mobile filtration offsetting a decline in the packaging business.
Curiously, while many industrial businesses like Cummins (NYSE:CMI), Caterpillar (NYSE:CAT), Joy Global (Nasdaq:JOYG) and Honeywell (NYSE:HON) are getting a tailwind from international sales, the opposite seems to be true for Clarcor. Sales to China were down in the engine/mobile business, and weakness in Europe in industrial/environmental also hampered overall performance.
Profitability was likewise a little disappointing. Gross margin did fall by about a point, but the company recouped some of this through its operating expenses and did report operating income growth of 11% and modest operating margin expansion.
It's unusual these days for an industrial company to post sales growth to China that is lower than the company's overall growth rate, let alone sales contraction. So it's worth exploring what is different at Clarcor. The company was talking about Chinese customers working down inventory and lower demand from shifted production schedules, but that's a little unusual given what companies like Cummins, Daimler, Honeywell and BorgWarner (NYSE:BWA) are saying about the Chinese heavy-duty vehicle market.
Maybe Clarcor is losing a little share to rivals like Cummins or Donaldson. Or maybe Clarcor simply has the wrong customers. For instance, Cummins' growth in China suggests its customers are seeing solid production growth, but other heavy-duty engine players like China Yuchai (NYSE:CYD) have not shown such remarkable growth of late. Proof then, perhaps, that "market growth" is no guarantee that every player in the market is growing.
The Bottom Line - Wait for the Bargain
Clarcor is by no means a bad company, and it does well for shareholders in carving out a fairly consistent mid-teens return on capital despite competing with Honeywell, Cummins, Millipore, Parker Hannifin (NYSE:PH) and the like. Clarcor also has a clean balance sheet, ample incremental acquisition opportunities and a lot of potential to grow in markets like healthcare/life sciences and energy (where the recent downturn in enthusiasm for nuclear energy could be a long-term opportunity).
On the other hand, there is the right price for every asset, and Clarcor's stock seems a little high right now. If everything breaks right for the company, the stock may beat the S&P 500 by a few percentage points on a longer-term horizon (three to five years). With growth currently looking a little shaky, though, that just does not seem good enough. By all means consider Clarcor for a watch list, but don't chase the stock today. (For additional reading, see The Ups And Downs Of Investing In Cyclical Stocks.)
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