GDI: Positive Catalysts and Quantitative Fundamentals Propel Price

Breakdown: (i) Story (ii) Price Target (iii) Catalytic Analysis (iv) Quantative Analysis (i) Story: Gardner Denver, Inc. engages in the design, manufacture, and marketing of compressor and vacuum products, and fluid transfer products in the United States, Europe, Canada, and Asia. It operates in two segments, Compressor and Vacuum Products, and Fluid Transfer Products. The Compressor and Vacuum Products segment offers rotary screws, reciprocating, sliding vane air compressors; positive displacement, centrifugal, and side channel blowers; liquid ring pumps and engineered systems; and single-piece piston reciprocating, diaphragms, and linear compressors and vacuum pumps. It also offers stationary air compressors that are used in manufacturing, process applications, materials handling, and power air tools and equipment; blowers, which are used in pneumatic conveying and wastewater aeration applications; liquid ring pumps that are used in vacuum applications and engineered systems, such as water removal, distilling, reacting, efficiency improvement, lifting and handling, and filtering, principally in the pulp and paper, industrial manufacturing, petrochemical, and power industries; and Diaphragm, linear, and single-piece piston reciprocating compressors and vacuum pumps, which are used in various original equipment manufacturers applications. The Fluid Transfer Products segment designs, manufactures, markets, and services various pumps, water jetting systems, and related aftermarket parts used in oil and natural gas well drilling, servicing and production, and in industrial cleaning and maintenance. This segment also offers loading arms, couplers, and other fluid transfer components and equipment for the chemical, petroleum, and food industries. Gardner Denver serves customers through independent distributors and sales representatives, as well as directly to original equipment manufacturers, engineering firms, packagers, and end users. The company was founded in 1993 and is based in Quincy, Illinois. (ii) Price Target: Through the use of eVal (a computer software program designed to model future forecasts) I have derived an Intrinsic Value for GDI of $76.41. In order to get this intrinsic value, I determined a multitude of factors, including, but not limited to, Forecast Horizon, This Year's ROE, Terminal Year's ROE, This Year's Sales Growth, Terminal Year's Sales Growth, and Cost of Equity Capital. Throughout my model, in accordance with many academic papers, I fixed the Terminal Year's Sales Growth at 4% and the Cost of Equity Capital at 8%. In the next following paragraphs, I will explain the values that I used in my model, as well as the reasons why: Forecast Horizon (10 yrs.) ? I have determined that even though the Machinery Industry is fairly mature, there is still major room for consolidation. Secondly, Gardner Denver is currently the market leader amongst its many competitors; however, I feel that this competitive advantage will diminish in the long run. Based upon this analysis, I felt that a Forecast Horizon of 10 years was appropriate. This year's ROE (17%) ? Based on my research, the Machinery Industry has an average ROE of roughly 17% for this year. However, over the past five years, Gardner Denver was able to achieve an average ROE of 19%. Based on the analysis of the company, as well as the industry as a whole, I determined that an ROE equal to the Industry standard, due to the maturity of the Industry, was conservative as well as a good estimate of this year's ROE. Terminal Year's ROE (12%) ? I determined that over the long term, the ROE should approach the companies Cost of Equity Capital (8%). Gardner Denver, however, has shown that they are an industry leader at both increasing revenues and reducing costs, and I believe this will allow them to maintain a slight competitive advantage, thus allowing for a 12% ROE in the long run. This year's Sales Growth (25%) ? Although sales growth for the last 5 years has averaged 31.9%, I see this as an unrealistically high number to use going forward. Gardner Denver has such high growth because of two years of 60%+ Sales Growth due to international expansion. A figure of 25%, decreasing to 4% in the long run, will allow for realistic growth internationally as well as domestically. Even though I achieved an intrinsic value of $76.41, I only believe that 25% of this mispricing will disappear over the coming twelve months (due to the catalytic analysis to follow), thus giving me a price target of $42.00 and an alpha of roughly 35%. (iii) Catalytic Analysis: Catalysts (Positive) ? ? Earnings Surprises (+) o Out of past 12 Q's, beaten analyst expectations 11 times ? Significant Corporate Events (+) o Recently announced share buy-back plan (5% of SO) ? Growth potential (+) o Due to recent consolidation within the market and Gardner Denver's presence as market leader, future expansion through acquisition is possible ? Sell-side Rating Changes (+) o Over past 3 months, 3 Analysts have increased EPS estimates ? Publicity (+) o No negative publicity o Recently announced positive change in management ? Institutional Interest (+) o 676,472 new shares purchased in past Q o 92% of SO owned by Institutions ? Addition to Benchmark (Push) o Not close enough to next capitalization threshold (iv) Quantitative Analysis: Earnings/Price Ratio - 0.1 Book/Market Ratio - 0.6 Sales/Price Ratio - 1.1 Cashflow/Price Ratio - 0.1 Free Cashflow/Price - 0.1 Earnings Growth/Price - 8.4 ROE - 19% ROA - 9.6% Free Cashflow Margin - 8.9% Operating Margin - 15.2% EPS YoY Momentum - Positive YoY Qtrly. Sales Growth - 10% Asset Turnover - 1.0 EBITDA/Debt - 1.0 A/R Turnover - 6.0 A/R Avg. Collection Period - 60.6 days Current Ratio - 2.1 Quick Ratio - 1.3 Interest Coverage Ratio - 9.5 Institutional Purchases - 1.1 Short Interest as % of Float - 1.9%