The #1 Overlooked Opportunity in the Energy Sector

October 30, 2009

This week as earnings season marches on, there’s a quiet opportunity brewing that I want to tell you about before Friday. For one reason or another, energy stock Dresser-Rand Group (DRC) is being overlooked right now and offers an excellent opportunity for short-term gains of 8%–10% when it posts its third-quarter earnings report.

Dresser-Rand is a $2.4 billion company that makes equipment used to refine oil and gas, and generate power, such as compressors and steam and gas turbines. The company also offers aftermarket services such as repairs and upgrades for its own products and equipment made by others. It’s a terrific “pick and shovel” energy play that’s global in scope.

More than half of DRC’s sales are derived from outside North America. With the dollar in decline recently, this adds to Dresser-Rand’s bottom line and translates to higher earnings.

What to Look For on Friday

In the second quarter, Dresser-Rand's earnings were up an impressive 77% over last year. This quarter DRC is expected to earn 61 cents per share, but thanks to improving sales growth and operating margins, the company could get to 66cents per share, for a modest, but stock-moving, 8% earnings surprise.

Normally, I wouldn’t get too excited over an 8% earnings surprise, but since August, DRC shares have been trading in a narrow range, interest has waned a bit and expectations have been lowered for the stock. When the numbers come out and the market sees this undervalued stock emerge from the shadows, the result will be a quick boost to the stock.

And, in my book, DRC has what it takes to be a good longer-term investment as well. My screens indicate this company has solid sales growth, operating margin growth and cash flow. However this is a smaller-cap stock, so if you buy DRC, expect some volatility.