Flow International (FLOW)

Here's something for the "low-priced stock" affectionado:

Flow manufactures Ultra High Pressure waterjet cutting systems and related products. These products are used to cut materials in different industries such as aerospace, automotive, disposable products, food, glass, job shop, metal cutting, marble, tile and other stone cutting and paper industries.

Flow is in negotiations to acquire its main competitor Omax Corporation, signing an option to acquire the company for $109m rising to $135m after 2 years subject to performance. Any merger will be subject to Hart-Scott-Rodino clearance. Flow currently has $33m in cash and minimal debt. Additional funding will be required, likely with an equity element. Omax is based a half mile from Flow’s headquarters, and like Flow has its roots in technology developed by Boeing (BA)engineers. Integration would be relatively easy from a cultural and logistical standpoint.

Omak has some technology that Flow does not, and also has unique overseas distribution channels. Omak would also benefit from Flow’s internet-based order fulfillment strength. Another advantage of the acquisition is that it will settle the outstanding patent litigation that has been ongoing for several years between Flow and Omak.

Further details will be available during Flow’s 2Q08 conference call to be held tomorrow. The stock has been beaten up since the retirement of the turn-around CEO, Stephen Light, but is up nicely this morning. It’s not too late to get in now, as I estimate a target of $12—but patience should be exercised, something that many of you may be lacking in spades.

EPS:
2007A $0.10 P/E: 74x
2008E $0.43 P/E: 17x
2009E $0.63 P/E: 12x

(Fiscal Years ending in April)