Oil-Dri Could Be a Gusher

Trivia question: What kind of oil company cannot make a profit in a world where oil sells for nearly $50 a barrel? Answer: an "oil" company that has nothing to do with hydrocarbons. Or more specifically, Oil-Dri Corporation (NYSE: ODC  ) , the world's largest manufacturer of cat litter, which reported a $0.04-per-diluted-share loss yesterday for its fiscal fourth quarter (an improvement over the year-ago quarter's $0.08 loss). That's a far cry from the tanker-loads of cash arriving at Exxon Mobil (NYSE: XOM  ) , ChevronTexaco (NYSE: CVX  ) , and BP (NYSE: BP  ) these days. And yet, it's Oil-Dri that intrigues me.

Call me crazy for getting excited over this stock, but it seems like a prototypical Peter Lynch play -- the kind of boring company he waxes ecstatic over in One Up on Wall Street. I mean, cat litter? You can't find a business much more mundane than that. It's practically guaranteed to set the Wall Street analysts to snoring. In fact, while taking a quick look at the company's stats from Yahoo! (Nasdaq: YHOO  ) Finance, you'll see that the page for "Analyst Estimates" is actually grayed out. It's as though Yahoo! considered creating such a page for the company but decided: "Fat chance."

If that's the case, though, then in this Fool's opinion, both Wall Street and Yahoo! may be making a big mistake. Huge. For the story with Oil-Dri is not in the GAAP profits (which went missing this quarter, by the way, only because Oil-Dri incurred $2 million in one-time charges related to a patent infringement case). The story's in the free cash flow, the metric for measuring true cash profitability that The Motley Fool prefers to use when evaluating companies for its Hidden Gems newsletter.

While Oil-Dri may have lost money this quarter on a GAAP basis, its free cash flow numbers tell a much different tale. The tale of a company with an enterprise value of less than $90 million; the tale of a company that earned nearly $13 million in free cash flow over the past 12 months. In short, this is the story of a company with an enterprise value-to-free cash flow ratio of just 6.8 -- and you're going to love the ending: The company pays a 2.7% dividend. That's 35% higher than the average S&P 500 behemoth is paying out, and it makes for a nice kicker to any capital gains the stock yields.

When's the last time you heard of Forbes or Business Week suggesting a cat litter company as an investment? Hidden Gems investors know that some of the best prospects for investing gains can be found in places most people would never look (at least, unless wearing gloves and armed with a pooper scooper). Yet over the past year, our fearless delving into the cat boxes of the investing world has unearthed 26% average gains for our subscribers, against just a 5% gain for the S&P 500. Want a peek at how we do it? Click here for a free trial.

Fool contributor Rich Smith owns no shares in any company mentioned in this article.