This Stock is a Definitely a Buy

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Gardner Denver (NYSE: GDI) has recently plunged 12% in one day, from $75.54 to $67.40 per share, due to the collapse of the buyout offer from SPX Corporation (NYSE: SPW). SPX previously intended to buy out Gardner Denver for around $4.2 billion, valuing each share at as high as $85. Is SPX’s offer generous? Or is it fair value for Gardner Denver? Should investors consider the dramatic drop in the company's share price as a buying opportunity?

Business Snapshot

Gardner Denver is a leading stationary air compressors and blowers manufacturers. The company has two main product groups; Industrial Products Group, which contributes 53% of the company's total sales, and the Engineered Products Group, with 47% of total sales. It was reported that in the former group, distribution sales channel generated around 42% of the total revenue, whereas 39% was generated via direct sales to the end users. In contrast, in the Engineered Products Group, 60% of the revenue was sold directly to customers, whereas 31% was sold to OEM. Gardner Denver had a diversified customer base, with no single customer accounting for more than 5% of its total consolidated revenue.

Decent Operating Performance

In the last 10 years, Gardner Denver has delivered quite a sustainable performance, with continuously positive operating cash flow and free cash flow. It generated positive profits in 9 out of the last 10 years, and 2009 was the only year that Gardner Denver reported negative income. This was due to $262.4 million impairment charges to reduce the goodwill level of Industrial Products Group. They were non-cash charges, thus the cash flow was not affected at that time. Trailing twelve months, Gardner Denver generated $5.41 EPS, along with $291 million in operating cash flow and $236 million in free cash flow. The company has a very small payout ratio. It has paid $0.20 per share in dividends in 2011, with a payout ratio of only 3.8%. 

Possible Synergy and Reasonable Valuation

SPX is a global specialized engineered solutions company with sales in more than 150 countries. The company operates in several business segments, including Flow Technology, Test and Measurement; Thermal Equipment and Services; and Industrial Products and Services. The majority of sales (about $2 billion out of total revenue of $5.46 billion) was generated from Flow Technology. The second biggest revenue source was Thermal Equipment and Services, with nearly $1.65 billion in sales.

For a while, SPX has been focusing on flow control equipment used with liquids ranging from petroleum to dairy products. It already sold Service Solutions Business to Robert Bosch GmbH for around $1.15 billion to exit the automotive industry. Actually, Gardner Denver has been a target of leveraged buyout from KKR & Co, as well as private equity firms Advent International, TPG Capital, and Onex, with the offers in the $70 per share range. However, SPX emerged as a top bidder, offering $85 per share. As of September 2012, SPX booked $2.3 billion in stockholders’ equity, only $346 million in cash, with the long and short-term debt of more than $2 billion. The total market capitalization is around $3.4 billion. Thus, in order to make an offer of $4.2 billion, SPX would need to raise much more capital either via more equity injection or debt issuance.

Many people had raised the issue of overpaying for Gardner Denver. However, at $4.2 billion, it was only nearly 8.9x EV/EBITDA for the company. Morgan Stanley wrote: “Comparing this to a sample of 47 large deals since 2009, we come to the conclusion that implied (valuation) multiples do not look egregious -- the average multiples paid since 2009 has been 2.1 times trailing sales and 12.9 times trailing EBITDA”

Cheapest Among Peers

The offer multiples were still reasonable compared with the valuation of Gardner Denver’s peers, including Atlas Copco AB (NASDAQOTH: ATLKY), Federal Signal Corp (NYSE: FSS), and Ingersoll-Rand (NYSE: IR). Atlas is valued the highest, at 10.85x EV/EBITDA, whereas Federal Signal Corp is valued at 9.51x EV multiples. Ingersoll-Rand is the cheapest, just slightly more expensive than the offer of SPX, at 8.74x EV/EBITDA.

My Foolish Take

At the current EV multiples of 7.5x, it is definitely cheap. Some analysts even think of the potential for a $90 per share offer for the company.  As Gardner Denver keeps looking for strategic partners or buyers, you may want to consider an opportunistic play on this industrial engineered products maker with a relatively low valuation.


hoangquocanh has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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