It's one thing not to be the darling of Wall Street, but quite another to be completely ignored by it. And although Sauer-Danfoss (NYSE:SHS) stands shoulder-to-shoulder with other providers of hydraulic equipment and components, like Eaton (NYSE:ETN) and Parker-Hannifin (NYSE:PH), nobody cares. There wasn't a single analyst question on the recent conference call, and institutional interest (or at least ownership) is very modest indeed.
I don't know about you, but that intrigues me.
Certainly Sauer-Danfoss' financial results merit notice. Sales were up 15% for the first quarter and up 19% on a currency-adjusted basis -- better than the growth achieved by either Eaton or Parker. And on the operating income front, growth was 73% and the operating margin was 9.5% -- which also compares pretty well with its competitors. Last but not least, operating cash flow was up strongly from the year-ago period.
Sauer-Danfoss supplies key hydraulic components for moving machinery like cranes, tractors, construction, and landscaping equipment. So if companies like Caterpillar (NYSE:CAT), Deere (NYSE:DE), Ingersoll-Rand (NYSE:IR), Terex (NYSE:TEX), and so on are experiencing strong demand for equipment (which they largely are, aside from Deere's agriculture business), there's demand for these hydraulic transmissions, motors, and valves as well.
In fact, according to management, there was particular strength in material handling, specialty equipment (like aerial lift equipment), and construction/road-building demand. Though strong turf-care results helped the agriculture/turf segment, the agriculture part hasn't been so strong lately.
I'm less giddy about the returns Sauer-Danfoss produces. Returns on invested capital have generally trailed those of its peers by a meaningful amount. Then again, this quarter's results annualize them to a nice-looking number, so perhaps that gap is shrinking. It's also worth noting that the Murmann family controls about 77% of Sauer-Danfoss. That doesn't exclude it from my potential watch list, but it's something to keep in mind all the same.
Valuing this stock leaves me a bit frustrated. Cash flow modeling suggests that it's not quite as cheap as Eaton or Parker, but I'm not sure that tells the whole tale. If returns are in fact improving (and that improvement is sustainable for the next few years), there could yet be some upside to these shares -- upside that static modeling can't always capture so well.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
