Tap Into Expensive Oil With Gardner Denver

Shares of Gardner Denver(GDI Quote) have been stuck in a frustrating range over the past few months, trading from the high $35s to the low $30s.

The machinery company offers an intriguing play, especially as commodity prices go through the roof. Gardner Denver is a dirty company, involved in the fluid-management business, which is essential for the cleaning of the day rigs used in drilling for oil.

Right now, we are in a huge period of capital expenditures as companies push to find and extract oil. With oil at record levels, rigs are under pressure to drill as much as they possibly can in order to take advantage of price increases. This is where Gardner Denver comes into play.

Oil rigs are dirty and hazardous places to work. Companies pay out tens of millions of dollars in workers compensation because of the dangerous conditions. Gardner Denver's fluid management business is involved in keeping rigs safe, clean and most importantly, running.

The company generates 60% of its revenue from outside of America, meaning it's not dependent on the slowing U.S. economy. It is also greatly aided by a positive currency conversion. The global market segment for Gardner Denver's industrial products is about $10 billion and growing 3%-5% annually. Management plans on growing 3 times the industry growth rate.

Revenue has grown 20%-plus since 2001. Cash flows from operating activates increased from $18 million in 1994 to $167 million in 2006. Gardner Denver is also financially flexible balance sheet, which is ideal for growth.

Gardner Denver is also very cheap compared to its group median. Gardner Denver's price-to-earnings (P/E) ratio is 9.8, compared to the group median of 14.8. This disparity seems a off to me for a few reasons:

1. Gardner Denver is No. 1 or No. 2 in all of its end markets. This leads to strong brand loyalty and possible pricing power. Hence, its P/E should be at least in line with the industry average.
2. Low net debt to capital means that Gardner Denver is a powerful cash-generating business.
3. Revenue has grown from $400 million in 2001 to $1.8 billion in 2007.

A few weeks ago, one of Gardner Denver's competitors, Robbins & Myers(RBN Quote), posted monster earnings. The strong results bode well for Gardner Denver, which could very well deliver the same.

For the quarter, Robbins posted first-quarter profit that topped analysts' expectations on higher sales, improved cost structure and currency exchange rate changes, sending shares up as much as 14% to a new high. The machinery for the maker also raised its 2008 earnings outlook.

GDI is a far better positioned company than Robbins with strong management. GDI is also more exposed to oil (which is a huge plus since the commodity is at record levels) and has greater international growth.

With its rig contracts set on $40 a barrel oil, anything above that is gravy on Gardner Denver's bottom line. Couple this with a very low valuation heading into earnings and Gardner Denver could rally sharply on good news.