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As a value investor, I always attempt to seek out excellent companies that get hammered down because of a misperception. In the case of the Wisconsin-based Gehl Company (GEHL), the manufacturer of agricultural and construction equipment has seen its stock price suffer because it provides equipment to the faltering residential housing market.

Though GEHL has reported recent weakness in sales to residential builders while also slightly lowering guidance for the remainder of the year, this is certainly not the whole GEHL story. With GEHL recently trading in the $22-23 area, the company sells for about 10x the 2007 consensus estimate. To me, this is an extremely low valuation for a company that is second only to Deere in providing a variety of equipment for the agricultural market and that I would also term "CAT-lite" in its sales to the construction market. The low valuation is not lost on company insiders, as three insiders have purchased GEHL stock in August. In addition, the weak dollar is helping boost GEHL sales in international markets, a factor that has also helped Caterpillar (NYSE:CAT) and Deere (NYSE:DE) in recent years. GEHL has made a strong effort to expand its penetration into high-potential international markets.

Getting back to my basic case, I think GEHL's dependence on residential construction has been overstated. The company has many pluses and, with a very modest market cap, would make an excellent acquisition for a company seeking access to markets where GEHL has major footholds. I find no other company with the potential of GEHL currently selling at about 10x this year's estimate.

Disclosure: Author has a long position in GEHL

Source: Gehl Company: Dependence on Residential Construction Overstated