It's not often that you come across an energy company that's solid and sizable, is poised for substantial earnings growth, has been around for more than a century and a half, and is under the radar of most investors.
In this case, I'm thinking about Dresser-Rand (NYSE: DRC ) , the Houston-based maker of rotating equipment, which is generally shorthand for the compressors and turbines -- along with other equipment -- used in a variety of energy and industrial functions. Specifically, the company's centrifugal and reciprocating compressors, gas and steam turbines, and gas extenders generally appear to be the oversized offspring of a marriage between a hippopotamus and R2-D2.
But while Dresser-Rand's equipment may sound mundane or arcane, it's nevertheless vital to a number of important energy and industrial activities in our world. For instance, compressors and turbines are crucial to natural gas gathering and lifting, gas storage and transmission, oil and gas refining, and the manufacture of synthetic fuels, chemicals and petrochemicals, and fertilizer.
Borrowing from the thoroughbreds
Since lineage clearly matters beyond the world of thoroughbred breeding, the Dresser-Rand pedigree can be tied to such quality entities as Dresser Industries, most of which is now part of Halliburton (NYSE: HAL ) , Berkshire Hathaway holding Ingersoll-Rand (NYSE: IR ) , engineering and construction powerhouse KBR (NYSE: KBR ) , and industrial giant General Electric (NYSE: GE ) .
The company, in its present configuration, was born at the beginning of 1987, when Dresser Industries and Ingersoll-Rand combined their common rotating equipment businesses to form a 50-50 joint venture. Early in 2000, Ingersoll-Rand bought the Texas company's share of Dresser-Rand. In October 2004, the unit was sold to a private equity firm, which followed up with an initial public offering of Dresser-Rand's shares in August 2005.
The customer list for Dresser-Rand's products and services includes the likes of Big Oil player Chevron (NYSE: CVX ) and independent refiner Valero (NYSE: VLO ) . Among the company's offerings is a set of equipment that separates gas and liquids during the petroleum production process, also enabling oil and gas producers to use previously wasted energy for power during the process -- without creating greenhouse emissions. It thereby permits a reduction in the size of production platforms and subsea modules.
Because its largest share of revenue is generated by aftermarket parts and services -- which bring with them higher margins than the company's new-equipment sales -- Dresser-Rand appears to have effectively duplicated Mr. Gillette's profitable razor-and-blade model. Indeed, 41% of its revenue occurred through new-unit sales in the most recent quarter -- resulting in a 6.2% operating margin -- while the remainder was brought in through aftermarket activities that chalked up an operating margin nearly four times as large.
Ready for earnings growth
The company also looks to be picking up financial speed. It boosted its bookings by 35% in the last quarter, while its backlog was up an impressive 54% from the first quarter of 2007. And looking at earnings expectations, the dart-throwers who follow Dresser-Rand expect that the per-share figure will rise by almost 75% this year, before adding about another 30% in 2009.
Despite the magnitude of that expected growth, Dresser-Rand carries a forward P/E of less than 14. Somewhat as a result, its PEG ratio is only about 0.6. And its consistent free cash flow production should provide ample flexibility for management's efforts to foster further growth at the company.
So there you have it: a solid, time-tested company with the sort of metrics and growth prospects that should intrigue us all. I hope that from now on Dresser-Rand will be dressing up most Foolish investment lists.
In the meantime, about 93% of all Motley Fool CAPS players who have rated five-star Dresser-Rand expect the company to outperform the market. Why not add your opinion? It's free, easy, and potentially powerfully profitable.
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