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Dresser-Rand Touches All-time High on Siemens' Takeover Buzz

Zacks Equity Research

Shares of Dresser-Rand Group Inc. (DRC), the U.S.-based compressor and turbine manufacturer, touched a new life-time high of $71.91 during its trading session on Jul 17. The company’s share price rallied after Germany's Manager Magazin revealed that Siemens Aktiengesellschaft (SIEGY) is interested in acquiring it.

The new apex price improved upon the last one of $67.38 hit on Jul 22, 2013. Dresser-Rand closed the session at $68.00, reflecting a 12.6% gain over the previous-day closing price. The trading volume was 8.1 million shares.

Siemens, the Germany-based engineering firm, is possibly contemplating a takeover bid or will likely indulge in a hostile buyout, if situation so demands. The move will enable Siemens to strengthen its natural gas drilling operations in the U.S.

For Dresser-Rand, the market has warmly welcomed the news and believes that Siemen’s takeover will work in the best interests of the company’s shareholders. If acquired, it will be integrated with Siemens’ Energy division that deals with power generation as well as supply of turbines, compressors, and complete solutions for industrial plants, particularly in the oil and gas industry.

After recording earnings growth of 7.9% in the past five years, we believe Dresser-Rand is well poised for another 15.6% hike in earnings in the next five years. The company’s forward price-to-earnings (P/E) multiple is estimated at 22.8x versus 16.6x for the industry.

Expectation of higher earnings in the years ahead should fetch Dresser-Rand better valuation, in case a deal materializes with Siemens. Also, it should relieve the company of its highly leveraged position, with a debt/equity ratio of 89.4% versus 41.5% for the industry.

Dresser-Rand presently has a market capitalization of $5.2 billion and carries a Zacks Rank #4 (Sell). Two better-ranked stocks in the industry include Cameron International Corp. (CAM) and Dril-Quip, Inc. (DRQ), each with a Zacks Rank #2 (Buy).

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