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. Stock Analysis

    3 Stocks that Are Top Bets for Retirement

    These three stocks are resilient, fundamentally sound and also pay generous dividends.
  2. Investing News

    Are Stocks Cheap Now? Nope. And Here's Why

    Are stocks cheap right now? Be wary of those who are telling you what you want to hear. Here's why.
  3. Investing News

    4 Value Stocks Worth Your Immediate Attention

    Here are four stocks that offer good value and will likely outperform the majority of stocks throughout the broader market over the next several years.
  4. Investing News

    These 3 High-Quality Stocks Are Dividend Royalty

    Here are three resilient, dividend-paying companies that may mitigate some worry in an uncertain investing environment.
  5. Stock Analysis

    An Auto Stock Alternative to Ford and GM

    If you're not sure where Ford and General Motors are going, you might want to look at this auto investment option instead.
  6. Mutual Funds & ETFs

    The 4 Best Buy-and-Hold ETFs

    Explore detailed analyses of the top buy-and-hold exchange traded funds, and learn about their characteristics, statistics and suitability.
  7. Stock Analysis

    The Biggest Risks of Investing in Netflix Stock

    Examine the current state of Netflix Inc., and learn about three of the major fundamental risks that the company is currently facing.
  8. Stock Analysis

    What Seagate Gains by Acquiring Dot Hill Systems

    Examine the Seagate acquisition of Dot Hill Systems, and learn what Seagate is looking to gain by acquiring Dot Hill's software technology.
  9. Mutual Funds & ETFs

    What Exactly Are Arbitrage Mutual Funds?

    Learn about arbitrage funds and how this type of investment generates profits by taking advantage of price differentials between the cash and futures markets.
  10. Investing News

    Ferrari’s IPO: Ready to Roll or Poor Timing?

    Will Ferrari's shares move fast off the line only to sputter later?
  1. How do I read and analyze an income statement?

    The income statement, also known as the profit and loss (P&L) statement, is the financial statement that depicts the ... Read Full Answer >>
  2. Can working capital be too high?

    A company's working capital ratio can be too high in the sense that an excessively high ratio is generally considered an ... Read Full Answer >>
  3. How do I use discounted cash flow (DCF) to value stock?

    Discounted cash flow (DCF) analysis can be a very helpful tool for analysts and investors in equity valuation. It provides ... Read Full Answer >>
  4. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  5. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
  6. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!