Fuel Tech, Inc. (FTEK - Get Rating) produces and commercializes air pollution control and reduction products and solutions for industrial and utility businesses globally. The company operates through two segments: Air Pollution Control Technology and FUEL CHEM Technology. Donaldson Company, Inc. (DCI - Get Rating), manufactures and supplies filtration systems and replacement parts through three segments–Engine Products, Industrial Products and Corporate.

Given rising concerns over climate change worldwide, countries have been taking steps to restructure their economies to reduce their carbon footprints. Most Western countries are expected to reach carbon neutrality by 2050, while major South Asian economies, such as China, plan to hit this mark by 2060. President Biden has announced his goal of eliminating carbon emissions from the power sector by 2035, and gradually achieving a zero-carbon footprint by 2050. His proposed $2 trillion-plus American jobs plan caters to a restructuring of the country’s infrastructure through eco-friendly methods.

The global air pollution control market is expected to grow at a 6% CAGR over the next three years. Thus, the demand for filtration products and services is expected to rise significantly, benefiting both FTEK and DCI.

FTEK has gained 131.2% over the past year, while DCI returned 36.4% over this period. However, in terms of year-to-date performance, DCI is the clear winner with 8.6% gains compared to FTEK’s 46.4% decline. Over the past month, DCI has improved marginally, while FTEK has lost 5%. But which stock is a better buy now? Let’s find out.

Latest Developments

DCI has been expanding its business operations substantially by launching new and upgraded products and services. The company launched a dual stage battery vent with new flex resealable vents and real time monitoring service as a standard feature to proprietary industrial dust collectors, and a filter minder monitoring solution to fuel filters, over the last two months. These products should help DCI to establish itself as a leading player in the filtration industry.

In February, FTEK raised approximately $25.80 million through an at-the-market private placement of 2.50 million shares. The company plans  to finance its working capital expenses from the  proceeds.

Earlier last year, FTEK’s low share prices resulted in a warning from Nasdaq  for its failure to  meet listing requirements. The  company regained compliance with Nasdaq’s listing rules on December 7. Shares of FTEK closed yesterday’s trading session at $2.08.

Recent Financial Results

DCI’s net sales increased 2.6% year-over-year to $679.10 million in its  fiscal second quarter, ended January 31, 2021. Its gross profit increased slightly from the same period last year to $225.30 million. EBT margin improved 110 basis points from its  year-ago value to 13.3%, while its adjusted operating margin increased marginally from the prior year quarter to 13.4%. However, the company’s net income and EPS declined slightly year-over-year to $56.20 million and $0.44, respectively.

For the first quarter, ended March 31, 2021, FTEK’s revenues increased 33.2% year-over-year to $5 million. This can be attributed to a substantial increase  in its revenues from its  FUEL CHEM segment. The company’s gross margin increased 6.9 percentage points from the prior year quarter, owing to a 20.2% decline in SG&A expenses. Its net income and EPS came in at $0.40 million and $0.01, respectively, indicating a substantial rise from their negative year-ago values. However, the company’s operating loss and adjusted EBITDA loss stood at $1.20 million and $0.90 million, respectively, over this period.

Past and Expected Financial Performance

DCI’s revenues increased at a 2.7% CAGR  over the past five years. Its tangible book value and levered free cash flow have increased at CAGRs of 11.5% and 46.9%, respectively, over the past three years.

In comparison,  FTEK’s revenues declined at a 20.8% rate over the past five years. The company’s tangible book value and levered free cash flow improved at CAGRs of 12.4% and 3.8%, respectively, over the past three years.

DCI’s EPS is expected to rise 16% in the about-to-be reported quarter (ended April 2021), 26% in the current  quarter (ending July 2021) and 10.5% in  2021. Consensus revenue estimates indicate a 16.8% rise in the about-to-be-reported quarter, 17.1% improvement in the current  quarter, and a 6.7% increase in the current year.

Analysts expect FTEK’s EPS to rise 40% in the current  quarter (ending June 2021), and 47.1% in  2021. The company’s revenue is expected to rise 7.5% in the current quarter, and 11.4% in the current year. However, the Street expects FTEK’s revenue and EPS to decline 16.4% and 133.3% year-over-year, respectively, in the next quarter, ending September 30, 2021.

Furthermore, DCI has an impressive earnings surprise history; it beat the Street’s EPS estimates in each of the trailing four quarters, while FTEK missed in two.

Profitability

DCI’s trailing-12-month revenue is 107.52 times than  FTEK’s  However, FTEK is more profitable, with a 37.3% gross profit margin, compared to DCI’s 33.98%.

Nonetheless, DCI’s net income margin, ROE, ROA and ROTC of 9.58%, 24.25%, 9.55% and 13.12%, respectively, compare well with FTEK’s negative values.

Thus, DCI is more profitable.

Valuation

In terms of forward EV/Sales, FTEK is currently trading at 1.09x, 174.3% higher than DCI which is currently trading at 2.99x. DCI is also more expensive in terms of trailing-12-month Price/Sales (3.04 vs 2.21) and Price-to-Book ratio (7.23 vs 1.22).

However, FTEK’s non-GAAP forward P/E multiple is negative. DCI, in contrast,  is currently trading at 27.31 times its 2021 EPS estimate.

POWR Ratings

DCI has an overall B rating, which equates to Buy in our proprietary POWR Ratings system. In comparison, FTEK has an overall C rating, which translates to Neutral. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

DCI has a B grade for Stability. This is justified because the stock has a maximum drawdown of 7. FTEK, in contrast,  has a grade of D for Stability. This is consistent with the stock’s high maximum drawdown of 21.3.

Both  stocks have a B grade  for Quality. This is in sync with their higher-than-industry gross profit margins.

Of the 86 stocks in the A-rated Industrial – Machinery industry, DCI is ranked #30, and FTEK is ranked #50.

Beyond what we’ve stated above, we have rated the both stocks for Momentum, Value, Growth and Sentiment. Click here to view additional FTEK Ratings. Get all DCI Ratings here.

The Winner

Air pollution is the biggest form of pollution globally, responsible for  more than seven million casualties every year, according to WHO. As major countries undertake steps to curb their carbon emission rates, companies such as  FTEK and DCI should witness high demand for their filtration systems and services. However, FTEK’s low profit margins despite high working capital points to inefficient operations. DCI’s impressive profit margins and market expansion strategies, on the other hand, we think make it an attractive investment bet now.

Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Strong Buy or Buy. Click here to view the top-rated stocks in the Industrial – Machinery industry.

Click here to check out our Industrial Sector Report for 2021

FTEK shares were trading at $2.05 per share on Thursday afternoon, down $0.03 (-1.44%). Year-to-date, FTEK has declined -47.16%, versus a 11.53% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...

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