Ingersoll Rand Executing Well And Better Days Are Still Ahead

A year ago I was neutral on Ingersoll Rand (NYSE:IR) shares, as I liked the multiyear growth story underpinned by the company’s exposure to capital spending and certain ESG touch points like energy and resource efficiency, not to mention the M&A optionality, but didn’t love the valuation. The shares have sold off about 5% or so since then, keeping pace with the broader industrial space and outperforming Atlas Copco (OTCPK:ATLKY).

I’m still not exactly thrilled about the valuation, and I don’t feel that my underlying expectations (high single-digit revenue growth and meaningful margin/FCF margin expansion) are conservative. Still, at a time when short-cycle names are rolling over, I think Ingersoll Rand is in better shape than most over the next five years (and beyond). While I’m tempted to hold out in the hope of a better price on a market sell-off, I don’t think there’s anything wrong with owning a good company (and one likely to outgrow its markets and peers) trading at a reasonable price.

 

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Ingersoll Rand Executing Well And Better Days Are Still Ahead

Ingersoll Rand: Leveraged To Strong Industrial Markets And Capital Reallocation

 

Another of my “really like the company, don’t like the valuation” names, Ingersoll Rand (IR) has produced a mix track record since my last update on this industrial name – the shares are up more than 13% since that article, which is worse than the S&P 500’s return over that time, but more or less in line with the broader industrial sector. The “but”, though, is that Ingersoll Rand posted a couple of strong quarters and made some significant positive capital/business allocation moves, so I’d argue there’s been some “catch up” to what I saw as a high valuation.

I wish I could say that Ingersoll Rand was a bargain today, but I don’t see that. There’s another “but” here, too, though, and that is Ingersoll Rand’s exposure to what could be a stronger-for-longer industrial capex cycle, as well as upside to a more aggressive capital allocation and portfolio transformation plan. Including estimated M&A, I do see Ingersoll Rand set up for returns on the low end of the high single-digits, and that makes it a more tempting call.

 

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Ingersoll Rand: Leveraged To Strong Industrial Markets And Capital Reallocation

Ingersoll Rand Checking All Of The Street's Preferred Thematic Boxes

Investors love a good story, and Ingersoll Rand (IR) is certainly obliging them, as this company checks almost all of the Street's preferred thematic boxes right now. Ingersoll Rand is strongly leveraged to the short-cycle industrial recovery, passed through the downturn with excellent decremental margins, offers outsized synergy opportunities, has M&A optionality, and offers a market share growth/leverage story, as pre-break up Ingersoll Rand didn't invest as much into its industrial businesses. Frankly, all that the story lacks is leverage to industrial software, HVAC/green retrofit, or life sciences/bioproduction, and even on the latter point, there is leverage to medical/scientific fluidics.

I thought Ingersoll Rand already had a pretty healthy valuation in August, but I grossly underestimated how much more the Street would pay for the company's leverage to the post-pandemic recovery and that thematic excellence. With that, the shares are up about 40% since my last article, roughly doubling the return of the larger industrial group and handily outperforming Atlas Copco (OTCPK:ATLKY) as well.

I still have issues with valuation, as mid-to-high single-digit revenue and FCF growth and over two points of operating margin improvement from 2021 to 2023 can't really get me to a good place on valuation. I don't discount the upside potential from more M&A moves, nor the opportunities to gain share or the value of a good story, but the drivers for further outperformance seem more limited to me.

 

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Ingersoll Rand Checking All Of The Street's Preferred Thematic Boxes

The New Ingersoll Rand Debuts Under Challenging Circumstances

While the combination of the former Ingersoll Rand’s non-HVAC businesses and Gardner Denver into the new Ingersoll Rand (IR) makes plenty of sense on a long-term basis, this is a tough time for this new company to make its debut. A host of short-cycle manufacturing end-markets are under significant pressure now, not to mention commodity markets like mining/metals and oil/gas, and acyclical businesses like medical/life sciences aren’t big enough to pick up the slack.

Ingersoll Rand should see its short-cycle business pick up around year-end, leading the way into a solid recovery in 2021 and beyond. Upstream oil/gas is going to be weaker for longer, I believe, but it’s now a smaller part of the overall business. On top of that are meaningful synergy and cost reduction opportunities. The “but” at the end of the road is valuation. While I do see a path to adjusted operating margins in the mid-teens and similar levels of FCF margin, the share price seems to already reflect that and I’m concerned the company could execute quite well objectively but still underwhelm from a relative price performance perspective.

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The New Ingersoll Rand Debuts Under Challenging Circumstances

Alfa Laval Buoyed Again By Strong Marine Results

As has been the case for most multi-industrials, particularly in the capital goods sector, Alfa Laval (OTCPK:ALFVY) (ALFA.ST) has shaken off some of the malaise that had pushed the shares down until relatively recently – while Alfa has outperformed its industrial peers since my last update, the 6-month and 12-month comparisons have Alfa lagging the market as sell-siders and investors have grown worried about what will happen as scrubber orders start to fade.

Although I’m not wild about the valuation (nor the valuation on industrials more broadly), this is still a company that I like quite a bit. I think there’s more opportunity in marine than just scrubbers, and I think longer-term opportunities in food, beverages, life sciences, and HVAC are not always given their due. Give me a 10% to 15% pullback and these shares get much more interesting as a potential longer-term holding.

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Alfa Laval Buoyed Again By Strong Marine Results

Seeking Alpha: 2 More Positive Steps For Cameron International

It's only been about a month since Cameron International (NYSE:CAM) posted a generally solid set of quarterly results, but the company has kept busy in the meantime. A new alliance between the Cameron-Schlumberger (NYSE:SLB) OneSubsea joint venture and Helix Energy Solutions (NYSE:HLX) looks like a good long-term opportunity, while the sale of the centrifugal compression business to Ingersoll Rand (NYSE:IR) largely completes the company's restructuring efforts and should allow a near-total focus on operations, not to mention bringing in capital for more buybacks. I don't think Cameron is cheap today, but I do like these steps forward and believe the company is well-placed to take advantage of a long offshore cycle.

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2 More Positive Steps For Cameron International

Investopedia: Stanley Black & Decker Offers Leverage To Construction And Internal Improvements

Investors have already started making moves on the basis of positioning themselves for the expected recovery in U.S. housing, but the leading tool company Stanley Black & Decker (NYSE:SWK) has yet to really go along for the ride. While housing-related stocks like Louisiana-Pacific (NYSE:LPX) and Mohawk (NYSE:MHK) have both nearly doubled over the past two years, Stanley Black & Decker stock is basically where it started.

Some of the lagging performance can be explained with stubbornly low margins and an increasingly debt-heavy balance sheet. At the same time, management has sold some of its housing-related assets and acquired an industrial fasteners business that offers uncertain long-term margins and cash flows at this point. All told, Stanley Black & Decker's stock is a curious proposition – while it is hard to argue that the shares are cheap on the basis of what we've seen recently, a strong recovery in the North American construction market coupled with a return to double-digit free cash flow margins would likely be powerful drivers for the stock.

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Seeking Alpha: Investors Have Bought Ingersoll Rand's Sizzle, Can They Deliver The Steak?

I'll give credit where it's due - the involvement of Nelson Peltz and his Trian Fund Management, and the willingness of Ingersoll Rand's (IR) management to embrace that involvement, has definitely delivered substantial near-term benefits to shareholders. These shares are up more than 40% over the past year as management has committed itself to a greater return of capital, improved operating efficiency, and the spin-off of its security business.

Things may even get better from here. There are actual signs of progress in margins, even though the company remains heavily exposed to end-markets (residential and commercial construction) that are not yet out of their trough. Even so, it looks like investors have already given management ample benefit of the doubt and fiddling with the balance sheet really doesn't seem likely to produce long-term value.

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Investors Have Bought Ingersoll Rand's Sizzle, Can They Deliver The Steak?

Investopedia: Does Blount Offer Investors A Small-Cap Recovery Play On Housing?

Blount (NYSE:BLT) is the sort of small industrial company that can go unknown and unfollowed for years unless and until it gets a little attention from the financial media. Although the severe decline in residential construction has meant challenging times for this leading producer of cutting chains and other products for the forestry and lawn/garden markets, the potential offered by end-market recoveries and increased operating leverage makes this a name worth watching.

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Seeking Alpha: Atlas Copco: Maybe The Best Industrial You Don't Know

Institutional investors may have the tools and resources that make international investing indistinguishable from domestic investing, but the retail investor is not so lucky. Consequently, high-quality industrial names like Atlas Copco (ATLKY.PK) can often go unnoticed by many investors. While Atlas Copco doesn't have the left-for-dead valuation of some industrials, investors who want a blue chip company with solid growth prospects can still pick up these shares for less than fair value.

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Atlas Copco: Maybe The Best Industrial You Don't Know

Seeking Alpha: Illinois Tool Works Hunkering Down

Industrial conglomerate Illinois Tool Works (ITW) was a growth laggard in the first quarter, and slowing demand in markets like Europe, China, and the U.S. didn't help matters for this quarter. Margins held up well, though, and management's decision to simplify the business during this lull ought to have the company in good position to post good margins whenever the recovery may come. Illinois Tool Works just isn't cheap enough to be my favorite industrial name (a common complaint with me and this stock), but those who believe in the margin expansion story may find more to like here, even if the company is facing a stiffer headwind going into the second half.

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Illinois Tool Works Hunkering Down

Seeking Alpha: Can Stanley Black & Decker Shake Off This Sluggishness?

Given that Stanley Black & Decker (NYSE: SWK) isn't quite as exposed to a U.S. housing recovery as commonly believed, it isn't the uncertain pace there that is keeping growth down. Rather, Stanley Black & Decker is seeing broad-based sluggishness across almost all of its businesses. While further diversification into industrial fasteners makes some long-term sense and the stock's valuation is not demanding, investors will have to have some patience to see this one work out.

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Can Stanley Black & Decker Shake Off This Sluggishness?

Seeking Alpha: Hope Springs Eternal At Ingersoll-Rand

By and large, sell-side analysts can be a vengeful lot. Companies that make them look bad by over-promising and under-delivering often get stuffed into the penalty box and forced to do penance for a time. That doesn't seem to be the case with Ingersoll-Rand (IR), though, as this company enjoys a surprising amount of sell-side support - at least surprising relative to the company's performance in recent years. (See earnings call transcript.)

A Pretty Mediocre End To The Year
Ingersoll-Rand announced that reported revenue fell more than 5% in the fourth quarter, though organic/"core" revenue was actually up slightly (on the order of 1-2%). Even still, the company did come up a little short.

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Hope Springs Eternal At Ingersoll-Rand

Seeking Alpha: Illinois Tool Works Tries To Change With The Times

Changing a successful model is a risk that most corporate executives simply don't have the guts to take. Make no mistake, while Illinois Tools Works' (ITW) heavy reliance on serial acquisitions and its decentralized structure break a lot of how-to rules they teach in business school, the results have been good. Companies like Dover (DOV) and Ingersoll Rand (IR) have closed some of the market outperformance gap in recent years, but ITW has still done well by investors over almost any long-term time horizon.

Then again, maybe that shrinking margin of outperformance is a good reason for the company to think about altering the plan a bit.

Respectable Results In Place Of Rumor
Although the whisper numbers on Illinois Tool Works were not especially strong going into the quarter, the company's results were just fine. Reported revenue growth came in over 10%, while organic growth was nearly 6%. Although ITW's exposure to short-cycle European end-markets was (and remains) a concern, organic growth over there was better than 2% (while growing nearly 9% in North America and better than 9% in China).

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Illinois Tool Works Tries To Change With The Times

Investopedia: Stanley Black & Decker May Be Surprisingly Cheap

Every once in a while it's a good idea for investors to broaden their horizons and re-examine some ideas of the past. While I have been spending a fair bit of time on industrial supply companies and overseas toolmakers like Atlas Copco and Techtronic, it may be the case that there's an interesting stock here in the States. More to the point, Stanley Black & Decker (NYSE:SWK) has some challenges and real risks, but looks surprisingly cheap after its latest earnings report.

The Consummate Noisy Quarter 

Unfortunately, assessing Stanley's quarter takes a fair bit of work for all of the moving parts. The company reported revenue growth of almost 16%, with 6% organic growth from a 5% volume increase and a 1% price increase. This was a pretty solid result. Breaking it down, the Construction/DIY business saw 4% reported growth (or 8% organic growth after excluding Pfister), Industrial was up more than 11% (7% organic), while Security was up almost 47% as reported, but flat on an organic basis.

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Investopedia: Johnson Controls Has A Lot To Live Up To

As the smoke clears from another disappointing quarter for Johnson Controls (NYSE:JCI), a peculiar theme emerges. In the normally harsh world of Wall Street, this auto parts, battery and building efficiency conglomerate still commands quite a bit of support and optimism from sell-side analysts and institutional investors. The question for Johnson Controls longs may not be so much about the potential of this name as it is about management's ability to realize that potential.

Another Disappointment, Courtesy of Building Efficiency  
Johnson Controls has not been a very dependable company when it comes to meeting expectations, and the company missed again this time around even though estimates took multiple trimmings in the past months. Revenue rose 9% (below a low-teens growth expectation), with strong growth in the auto parts business (up 15%) offset by low single-digit performance in building efficiency (4%) and batteries (4%).

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Investopedia: Is Ingersoll-Rand's Bar Finally Low Enough?

For all the talk of restructurings, initiatives and goals, the reality is that companies generally stay more or less in their historical slots - good companies continue to be good companies and laggards continue to lag. That makes it difficult to have a lot of faith in the idea that Ingersoll-Rand (NYSE:IR) is underpriced and primed to be a solid stock over the long term. Although IR does have some solid businesses, there is just simply no record or habit of outperformance here and investors bet on that at their peril.

Ample Skepticism  
Ingersoll-Rand certainly lives in a tough neighborhood these days, as not only have industrials been weak in general, but those with above-average exposure to areas like construction have had an even tougher go of it. That said, Ingersoll-Rand has still suffered more than most; it's 2011 performance certainly trails the likes of United Technologies (NYSE:UTX), Johnson Controls (NYSE:JCI), Honeywell (NYSE:HON) or Dover (NYSE:DOV).

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Investopedia: United Technologies Finds Some Turbulence

High expectations are great for a stock when the company delivers and shareholders see nice gains in their portfolio. The trouble with high expectations (and high valuations) is that the market is quick to punish what would otherwise be a solid performance. That would seem to be the biggest risk for United Technologies (NYSE:UTX) these days, as the company continues to sport both solid performance and a healthy valuation. 

The Quarter That Was  
Though there were some hiccups, United Technologies reported an all-around solid quarter (and one where revenue exceeded expectations). Revenue rose more than 9% as reported, with 6% organic growth. Top-line growth was led by the Otis business, while Hamilton Sunstrand and Carrier were close behind. Pratt & Whitney and Sikorsky were the laggards this quarter, but both still posted better than 5% revenue growth. 



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United Technologies Finds Some Turbulence (UTX, BA, GE, GR, SI)

Investopedia: A Rare Stumble For Emerson

Industrial conglomerate Emerson (NYSE:EMR) offers an interesting case-study for investors after reporting its second quarter numbers. Should investors overlook a small stumble from an otherwise reliable and well-run industrial company, or should investors flee at this first sign of trouble and move into hotter names? 

How an investor answers this question probably goes straight to the heart of their philosophy as an investor. Patient investors who seek out well-run companies for long-term gains should probably think of adding more, while investors who embrace higher turnover may well find it is time to chase faster prey.

Some Turbulence in a Strong Q2 

On the whole, Emerson had a solid second quarter report, but the results were a little shy of analyst expectations - and for better or worse, that does shape a lot of near-term stock performance.

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Investopedia: Cummins Finds Another Gear

It looks like truck engine maker Cummins (NYSE:CMI) is back to its old ways by posting eye-popping growth and handily surpassing estimates. As the global truck market continues to grow, it looks like Cummins should have plenty of opportunities to continue to grow its already impressive business.


Better Results Down the Line at Cummins
Cummins seems to be one of the relatively few industrial companies not seeing any real margin pressures in the final results. Sales jumped 56% from last year's first quarter (though declined 7% sequentially), led by 68% growth in the engines business. Growth was strong across the board, though, as power generating was up 54%, components were up 47% and distribution sales rose 35%. (For more, see Truck-Makers Still Hauling In Profits.)

As mentioned, margins were not problematic. Gross margin rose 50 basis points from the year-ago quarter, while operating income doubled and those margins grew more than three full basis points. Also encouraging is that those margins grew sequentially - gross margin rose a full point on that basis, while operating margin grew about 70 basis points. (For more, see The Bottom Line On Margins.)


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