From its humble beginnings making control systems for water wheels in the 1870s, Woodward Governor (NASDAQ:WGOV) today develops essential components for aerospace, transportation, and electrical generation industries. Although governors are designed to help regulate machine operations, the company has been running on all cylinders lately.

Woodward has been designing governors longer than practically anyone else. To get an idea of Woodward's reputation, consider this: Today it sells its systems for aerospace turbines to Boeing (NYSE:BA), Airbus, and the U.S. government.

Not exactly a lightweight
The company reported its fourth-quarter and full-year fiscal 2008 results last week, and the performance was definitely promising. The company grew sales by 21% for both the quarter and the year. Woodward earned $0.51 for the quarter, bringing its year-end total to $1.75 per share. Those were good for increases of 42% and 26%, respectively, from the year-ago periods, after adjusting last year's quarterly number for an income tax benefit.

Nevertheless, the company's share price set a new 52-week low after the announcement. Why would the market react so mercilessly to such glowing results? The answer is in management's 2009 guidance.

Where the dollars are
In recent years, Woodward has operated in an environment where the euro and the pound strengthened steadily relative to the U.S. dollar. The recent reversal of that trend should put pressure on next year's results, and continuing growth in its European wind turbine business compounds the problem. It sells its control systems for wind turbines to global industrial conglomerates like General Electric (NYSE:GE), Siemens (NYSE:SI), and Emerson Electric (NYSE:EMR), and a significant portion of those sales have been originating in Europe, where currencies are now weakening relative to the U.S. dollar.

Other than the negative forward-looking foreign exchange outlook, however, things seem to be going pretty well for Woodward. Organic sales growth in 2009 is expected to be flat to slightly up, which it isn't bragging about. But management is projecting $125 million in free cash flow, which would be substantially higher than current levels. Also, it shouldn't have any trouble covering its interest payments to debt holders.

Reflections of a Fool
With clients that include some of the best known blue-chip industrials, from Caterpillar (NYSE:CAT) to Cummins (NYSE:CMI), Woodward has strong prospects to cash in on major infrastructure projects slated throughout the world. The main problem may be financing, if the worldwide credit crunch continues.

Be that as it may, Woodward has a trump card to play. Its core business is centered on improving energy efficiency in power generation applications from wind turbines to diesel engines, so investors shouldn't rule out government backstops as means of compensating Woodward for potentially weaker sales in the private sector.

For current shareholders, you could do worse than holding on to Woodward. And if you're currently on the outside looking in, watch out for good buying opportunities on the horizon.