Cat people, dog people, investors of all stripes! Once again, 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 largest manufacturer of kitty litter in the country. The company reports its fiscal Q2 2007 earnings on Tuesday.

What analysts say:

  • Buy, sell, or waffle? Exactly zero analysts are following Oil-Dri, giving attentive Fools a great opportunity to spot a bargain -- if bargain it is.
  • Revenues and earnings. No analysts means no estimates for either revenues or earnings. Natch.

What management says:
CEO Daniel Jaffee pronounced himself "pleased" with Oil-Dri's "healthy sales growth and the positive results of cost savings programs" last quarter, and the pleasure looks to keep on coming. Although the firm grew its quarterly gross margin nearly 300 basis points year over year, Jaffee reminded investors that Oil-Dri has still not yet returned to its margins of yesteryear. While some might think that a bad thing, though, I interpret Jaffee's reminding investors of this fact as indicating a determination to get those margins back again.

What management does:
As the table below reflects, Oil-Dri reversed a two-year-long slide in margins last quarter, growing its rolling results at all levels. Credit Jaffee's 300-basis point increase in the gross for getting the ball rolling.

Margins

7/05

10/05

1/06

4/06

7/06

10/06

Gross

21.5%

20.4%

19.4%

19.2%

18.6%

19.2%

Operating

5.3%

4.7%

4.5%

4.2%

4.2%

4.8%

Net

3.5%

3.3%

3.1%

2.6%

2.6%

2.8%
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Reviewing Oil-Dri's Q1 earnings back in December, I observed that even though the firm had posted negative free cash flow for that quarter, this didn't worry me. The reasons: 1) "Oil-Dri has burned cash in the first quarter of every fiscal year for the past decade, save two (2000 and 2002)," so this was not out-of-the-ordinary bad news. 2) "Usually, the firm makes up the difference on its negative Q1 free cash flow, and then some, in fiscal Q2."

Well, guess what? Tuesday comes the moment of truth. Those Q2 results are due, and we'll be looking for some hefty cash inflows to bolster Oil-Dri's balance sheet. Key to this, as we mentioned last quarter, will be the firm's ability to get its inventories back in check. Although Oil-Dri improved in this regard last quarter, on average over the last two quarters, its inventories are still outpacing sales growth 17% to 11%. The more progress Oil-Dri makes here, the more working capital it can unlock and transform into sweet, sweet free cash flow.

What did we expect out of Oil-Dri last quarter, and what did we get? Find out in:

Fool contributor Rich Smith does not own shares of any company named above.