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Thursday, July 6, 2017

Potential Investment Outlook for Ingersoll Rand ($IR) NYSE

Ingersoll Rand ($IR)


Ingersoll-Rand’s (IR) two operating divisions include Climate and Industrial. Ingersoll-Rand plc designs, manufactures, sells, and services industrial and commercial products. It operates through Climate and Industrial segments. The Climate segment offers building management, bus and rail HVAC, control, container and cryogenic refrigeration, diesel-powered refrigeration, ductless, geothermal, package heating and cooling, rail and self-powered truck refrigeration, temporary heating and cooling, trailer refrigeration, unitary, and vehicle-powered truck refrigeration systems. This segment also provides aftermarket and OEM parts and supplies, air conditioners, air exchangers and handlers, airside and terminal devices, auxiliary power units, chillers, coils and condensers, gensets, furnaces, heat pumps, home automation, humidifiers, hybrid and non-diesel transport refrigeration solutions, indoor air quality, industrial refrigeration, motor replacements, performance contracting, refrigerant reclamation, thermostats/controls, transport heater products, and water source heat pumps. In addition, this segment offers energy and facility management, installation contracting, rental, and repair and maintenance services; and service agreements. The Industrial segment provides air treatment and separation, engine starting, ergonomic material handling, fluid handling, precision fastening, and mobile golf information systems; and compressors, airends, blowers, dryers, filters, golf vehicles, hoists, fluid power components, power tools, pumps, rough terrain vehicles, utility and low-speed vehicles, and winches, as well as aftermarket controls, parts, accessories, and consumables. The company markets and sells its products under the American Standard, ARO, Club Car, Nexia, Thermo King, and Trane brand names through sales offices, distributors, and dealers in the United States; and through subsidiary sales and service companies with a supporting chain of distributors worldwide. Ingersoll-Rand plc was founded in 1872 and is headquartered in Swords, Ireland.


We anticipate Ingersoll Rand to benefit from an improving economy and strength in the U.S. construction industry, and look for the Climate business to post mid-single-digit growth. We also expect IR to benefit from recent acquisitions. The company recently increased its dividend by 25% and has a share buyback plan. We are maintaining BUY rating but raising our target price from $105 to $110, which implies a P/E multiple of 24.4 times our FY17 earnings estimate.


Ingersoll Rand recently reported first-quarter earnings that exceeded analyst expectations. On an organic basis, 1Q17 revenue rose 4% sequentially to $3.0 billion. Bookings were even stronger, increasing 7% to $3.4 billion. The adjusted operating margin increased from 8.1% to 8.3%. Adjusted EPS rose 14% to $0.57, above the consensus estimate of $0.53. Shares outstanding decreased 2.2% year-over-year.

During the first-quarter conference call, the company maintained guidance for 2017. Management projects operating earnings of $4.35-$4.50 per share and organic revenue growth of 3%.


We are keeping our 2017 EPS estimate at $4.50, based on management’s guidance and better-than- expected  earnings over the past two quarters. We are also leaving our 2018 estimate at $4.90 per share. Our five-year earnings growth rate estimate is 10%, above-average for an industrial company.

The company faces a number of risks. Headquartered in Ireland, Ingersoll Rand faces the risk that the U.S. government may end its tax benefits and forbid contracts to U.S. companies that have reincorporated abroad. Acquisitions are part of IR’s growth strategy and pose integration risks. Ingersoll-Rand has reduced its exposure to the heavy-equipment business, providing it some protection from weak construction activity. Acquisitions have also helped to create a more diversified business. Ingersoll Rand generates revenue overseas and its earnings are usually affected by the global economy. Ingersoll Rand is also sensitive to fluctuations in the dollar.


The stock has outperformed over the past three months, rising 13%. Over the past 12 months, the shares have also performed well, gaining 46%. The shares have also outperformed the industrial ETF over the past 1-year, 5-year and 10-year periods. 

To value the stock, we use comparables and historical comparisons and a dividend discount model. IR shares are trading at 20.3-times our 2017 estimate, near the top of the historical range of 9-21. On a price/sales basis, the shares are trading above the midpoint of the five-year range. The dividend yield of 2.0% is near the middle of the five-year range. Compared to its peers, IR's multiples are generally below those of its peers. We are reiterating our BUY rating, but raising our target price from $105 to $110, which assumes an above-average P/E ratio on our estimated 2017 EPS.

Ingersoll Rand (IR)
Current Price: $92.12
Target Price: $109
Current Valuation: 20.4 times FY17 EPS
Target Valuation: 24.4 times FY17 EPS


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