M&A Musings in the Industrials Market

American manufacturers aren’t the only industry enjoying the rebound in overseas economies, Cramer said Tuesday. The filtration business is revving up, too.

“As manufacturers all over the globe start to add capacity,” Cramer said, “that means they need new filtration equipment.”

Think about it: Airplanes, heavy-duty trucks, mining draglines, air compressors—they all need reliable filters. So, too, does any application requiring clean water or other liquids. And environmental guidelines make filters a necessity as well.

To play the trend, Cramer recommended a cross between a life-sciences company like Millipore, which was bought in July by the German chemical company Merck KGA, and, say, an industrial automation firm like Emerson Electric . Something like Pall , one of the largest filtration, purification and separation names out there.

Pall makes all kinds of filters: the kind that protects a municipality’s water, the kind that allows for cleaner emissions at power plants, those for industrial machinery, aircraft and ships. The company also produces filters that prevent contamination in the manufacturing of microelectronics like semiconductors and data storage. Plus, there’s food and beverage filtration, blood filtration for the medical market and filtration, separation and purification technology used to make drugs and vaccines.

Another great thing about this business: Pall makes a ton of recurring revenue from replacement filters. As Cramer said, “They are the blades once you have the razors, they’re the iTunes once you have the iPods.” And with about 75% of the company’s revenues qualifying at recurring, investors “get some safety and stability from this one.”

Pall just last week reported a better-than-expected quarter and raised guidance for 2011. And gross margins, the percentage of each dollar of sales that becomes profit, is up to 50%, and on track for 51% by 2013. At the same time, 67% of sales come from outside the Western Hemisphere, making this a solid international play as well. And the company’s two segments, industrial and life sciences, are expected to see a market potential of $39 billion and $15 billion, respectively, up from a revenue base of just $1.2 billion each presently.

While Pall at $41 and change may be near its 52-week high, more importantly, Cramer said, is what the stock would fetch should it be taken over a la Millipore. And he thinks PLL could be worth as much as $60 to a potential acquirer, or a 46% premium to Tuesday’s close.

“Better than a sharp puff of unfiltered air to the lungs,” Cramer said.

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