Filtration has proven to be a consistently popular business with many investors and corporations. The appeal makes sense - as performance and environmental quality demands increase, so does the demand for better filtration. Filtration also tends to be a business oriented towards defensible high-margin consumables business. All of that said, Clarcor's (NYSE:CLC) business is not looking so strong right now and it's worth asking why that is.

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Weak Second Quarter Results
Clarcor's performance this quarter (and forward guidance from management) was weak, both relative to estimates and in absolute terms. Revenue fell 1%, and only the industrial/environmental segment showed growth (and barely any at that). Sales in the engine/mobile business were down about half a percent, industrial/environment was up just under 1% and revenue from the packaging segment fell 18%.

While revenue was feeble, margins were good, all things considered. Gross margin was flat with last year, while operating income rose 1%. Operating income in the engine business was flat, while the industrial business saw 10% growth. Profits in the packaging segment dropped significantly (43%), but this is a relatively small business.

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China Shows up Again
Industrial companies from Caterpillar (NYSE:CAT) to Cummins (NYSE:CMI) to Eaton (NYSE:ETN) have been lamenting the weakening tenor of business to China. Add Clarcor to the list, while the company's sales into the Chinese-heavy vehicle OEM market aren't that large, they fell 25% this quarter.

But Why Is the U.S. Aftermarket So Weak?
Blaming weakness in China is all well and good, but management's comments on a weak heavy-duty aftermarket in the U.S. are concerning. Vehicle filtration demand in the U.S. has in the past correlated with active tonnage, and while truck tonnage has been doing OK, railroad tonnage has been flagging on very weak coal demand.

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What's a little unusual is that neither Donaldson (NYSE:DCI) nor Cummins talked about weakness in vehicle filtration demand when they reported their first quarter earnings. So, is Clarcor's performance a sign that business has weakened significantly since then, is it an issue with Clarcor's distributors running down inventory, or is Clarcor losing share in the aftermarket?

The Bottom Line
I can't say for certain whether Clarcor is in fact losing share, but their business does look a fair bit weaker than comparables like Donaldson or Cummins. Moreover, with heavy vehicle production levels looking weaker across the board, it's hard to get excited about the near-term market conditions.

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What I do know is that Clarcor is still expensive and the growth potential doesn't seem to validate the premium. Clarcor is a well-run business and the filtration business is a good one to be in, but I wouldn't pay a double-digit EV/EBITDA multiple for a business with this growth profile.

At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.