Foolish Forecast: Oil-Dri Towels Off

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Cat people, dog people, investors of all stripes, it's time to check in on an investment that can appeal to the pet lover in all of us: Oil-Dri Corporation (NYSE: ODC), the country's largest manufacturer of kitty litter. The company reports its fiscal Q2 2006 earnings tomorrow.

Wall Street Wisdom:

• General consensus. There is none. No one follows Oil-Dri on Wall Street; individual investors have this company all to themselves.
• Revenues. Without analyst guidance, I'd suggest that you expect something in the mid-single digits. Oil-Dri grew sales 8% year over year last quarter, and 3% the quarter before that.
• Earnings. After losing money in Q4 2004 as a result of one-time charges, Oil-Dri turned things around and made a profit in the next fiscal year. But the company's quarterly earnings have been falling sequentially since the second quarter of 2005. The combined effect has boosted earnings 91% in the last six months in comparison to the equivalent year-ago period. I don't expect to see quite so large an increase repeat itself tomorrow -- but the company did promise to introduce price increases on several products, and surcharges to compensate for higher energy costs, in this quarter. Those should help.

Margin watch:
Oil-Dri's margin trends are a little tricky, so I'll walk you through them. Rolling gross and operating margins are on a downtrend. Net margins look like they're improving, but actually they've just returned to normal. The thing is, the fiscal Q4 2004 loss artificially depressed the company's net in the July quarter and the subsequent three quarters. The rolling net margin then bounced back to its "normal" level in the July 2005 quarter.

Margins %	7/04	10/04	1/05	4/05	7/05	10/05
Gross	23.3	22.9	22.9	22	21.5	20.4
Op.	5.9	5.6	5.1	5.1	5.3	4.7
Net	2.7	2.5	2.7	2.8	3.5	3.3

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ending in the named months.

Foolish lookout:
Over the past 12 months, Oil-Dri generated only $5 million in free cash flow. That's been quite a disappointment after the $14.4 million generated in the previous 12 months, and far below historical levels of cash generation. Oil-Dri also went free cash flow-negative last quarter, as capital expenditures more than ate up the company's cash generated from operations. But don't fret -- I don't expect we'll see that happen tomorrow. Historically, the company burns cash in its first fiscal quarter, then generates excess free cash flow the rest of the year.

Competitors:
These include Amcol (NYSE: ACO) and Church & Dwight (NYSE: CHD).

Fool contributorRich Smithdoes not own shares of any company named above.