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.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

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.

SEE: Margin Trading: Introduction

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.

SEE: 8 Signs Of A Doomed Stock Slideshow

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.

SEE: How To Build A Strategy, Part 1: Market Conditions

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.

Related Articles
  1. Investing News

    Bank Stocks: Time to Buy or Avoid? (WFC, JPM, C)

    Bank stocks have been pounded. Is this the right time to buy or should they be avoided?
  2. Stock Analysis

    Why the Bullish Are Turning Bearish

    Banks are reducing their targets for the S&P 500 for 2016. Here's why.
  3. Stock Analysis

    How to Find Quality Stocks Amid the Wreckage

    Finding companies with good earnings and hitting on all cylinders in this environment, although possible, is not easy.
  4. Stock Analysis

    Analyzing Sirius XM's Return on Equity (ROE) (SIRI)

    Learn more about the Sirius XM's overall 2015 performance, return on equity performance and future predictions for the company's ROE in 2016 and beyond.
  5. Stock Analysis

    Will Virtusa Corporation's Stock Keep Chugging in 2016? (VRTU)

    Read a thorough review and analysis of Virtusa Corporation's stock looking to project how well the stock is likely to perform for investors in 2016.
  6. Stock Analysis

    Analyzing Porter's Five Forces on JPMorgan Chase (JPM)

    Examine the major money-center bank holding firm, JPMorgan Chase & Company, from the perspective of Porter's five forces model for industry analysis.
  7. Investing News

    What You Can Learn from Carl Icahn's Mistakes

    Carl Icahn has been a stellar performer in the investment world for decades, but following his lead these days could be dangerous.
  8. Stock Analysis

    Analyzing Dish Network's Return on Equity (ROE) (DISH, TWC)

    Analyze Dish Network's return on equity (ROE), understand why it has vacillated so greatly in recent years and learn what factors are influencing it.
  9. Fundamental Analysis

    5 Must-Have Metrics For Value Investors

    Focusing on certain fundamental metrics is the best way for value investors to cash in gains. Here are the most important metrics to know.
  10. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  1. When does a growth stock turn into a value opportunity?

    A growth stock turns into a value opportunity when it trades at a reasonable multiple of the company's earnings per share ... Read Full Answer >>
  2. What is the formula for calculating EBITDA?

    When analyzing financial fitness, corporate accountants and investors alike closely examine a company's financial statements ... Read Full Answer >>
  3. How do I calculate the P/E ratio of a company?

    The price-earnings ratio (P/E ratio) is a valuation measure that compares the level of stock prices to the level of corporate ... Read Full Answer >>
  4. How do you calculate return on equity (ROE)?

    Return on equity (ROE) is a ratio that provides investors insight into how efficiently a company (or more specifically, its ... Read Full Answer >>
  5. How do you calculate working capital?

    Working capital represents the difference between a firm’s current assets and current liabilities. The challenge can be determining ... Read Full Answer >>
  6. What is the formula for calculating the current ratio?

    The current ratio is a financial ratio that investors and analysts use to examine the liquidity of a company and its ability ... Read Full Answer >>
Trading Center