July 18, 2011 - Sauer-Danfoss Inc. (SHS-NYSE) designs, manufactures, and markets hydraulic, electronic, and mechanical components, as well as software and integrated systems that generate, transmit, and control power in mobile equipment.

It also offers electronic controls, including microprocessor-based controllers, intelligent displays, joysticks, and electronic sensors, as well as develops and licenses software that helps its customers in integrating components into systems, and in developing their own solutions; and proportional valves, such as electro hydraulic valves for forestry and agricultural harvesting equipment, and actuated valves for construction equipment.

In addition, the company provides open circuit gear pumps and motors under the TurollaOCG brand name; cartridge valves and hydraulic integrated circuits under the Comatrol brand name; directional control valves; inverters under the Schwarzmuller Inverter brand name; and light power hydrostatic transmissions, gear reduction drives, piston pumps, and wheel motors under the Hydro-Gear brand name.

Sauer-Danfoss Inc. sells directly or through distributors to original equipment manufacturers of mobile equipment, including construction, road building, agricultural, turf care, material handling, and specialty equipment primarily in the Americas, Europe, and the Asia-Pacific region. The company was founded in 1986 and is based in Ames, Iowa. Sauer-Danfoss Inc. is a subsidiary of Danfoss A/S.

That headline is correct. SHS traded at $2.40 in March of 2009 when the rest of the market was tailspinning to oblivion. Then it started higher and kept going, reaching a new all-time high of $65.04 on May 5 of this year. That's a gain of 2608%. In 26 months. Investors are now wondering if the best is yet to come or has already been.

All rockets need fuel. For stocks, that fuel is earnings. SHS has plenty of earnings. While it showed a very painful loss of $7.15 a share in 2009 (see all-time low above), earnings have boomed since. Last year, they finshed at $2.30 (an almost $10 a share turnaround). This year, expectations are for $4.00 a share, then $4.30 in 2012. Next earnings call will be on August 3. Look for $1.05 compared to 50 cents last year in the second quarter.

After the first quartter's strong report ($1.36 vs 34 cents in 2010), management felt bold enough to up its guidance for the year by 50 cents, going from $3.50 to $4.00. The large backlog registered at the end of the quarter gave management plenty of confidence, up 55% over the same order level in the first quarter last year. Helping fuel the growth was higher commodity prices that will inspire more agricultural equipment purchases, one sector that uses SHS's products. One more source of better earnings: lower interest payments as the company retired $40 million in short term debt recently. Another benefit: the company restructured in 2009 (hence the large loss). With a leaner, more efficient business, expect operating and profit margins to expand this year and next.

There's only one drawback to exceptional growth: comparisons going forward. While this year will show a powerful jump in earnings, next year will be a challenge to top it (in terms of percentage improvement). It can't. Analysts see good potential in China and Brazil as those two economies continue to lead the rest of the world in exceptional progress. Look for these two juggernauts to contribute significantly in 2012. Beyond next year, expect China and India to add growth as the Asia-Pacific region becomes more important and profitable.

Essential numbers: Market Cap is $2.30 billion. Price to book is 5.90. Book value is $8.01. Operating margin for the last 12 months was 18.01% and Profit margin was 14.48%. Return on equity is worth repeating: 90.46%. Truly remarkable. Return on assets was also noteworthy: 17.45%. Total revenues for the last 12 months were $1.82 billion. Total cash is $38.95 million for 80 cents a share. Total debt is $239.17 million. Current ratio is 1.71. Beta is 2.26. There are 48.41 million shares Outstanding with a Float of 11.59 million. Insiders own 76.63% of the stock. Institutions have 19.40% of the Float. There are no dividends. However, dividends of 70 and 72 cents were paid in 2007 and 2008 respectively.

SHS is not a well known stock, nor is it closely followed. Even with that, its price increase in the last 2 years is notable. Obviously investors have discovered this jewel without much fanfare from the Street. Just goes to show that when you deliver earnings, the world notices.

- Company Web site: www.sauer-danfoss.com

   Ted Allrich