Analysts' Choice: Ingersoll-Rand Has Hot Future

12/5/2016


  Recent Price
$75
  Dividend
$1.60
  Yield
2.1%
  P/E Ratio
18
  Shares (millions)
262
  Long-Term Debt As % Of Capital
35%
  52-Week Price Range
$76.45 - $47.08

The market's sharp pivot toward economically sensitive stocks has provided a lift to a number of industrial names, including Ingersoll-Rand PLC ($75; IR). The stock rose 11% in November, far outpacing the 3% return of the S&P 500 Index. But more than just a sector story has pushed these shares higher.

In the September quarter, the company topped analysts' sales and profit expectations. Also, the company just boosted its dividend for the second time in 12 months, more than doubled its free cash flow this year, and upped its earnings guidance for 2016 overall. The stock, a recent addition to the Forecasts Long-Term Buy List, seems likely to outperform the market over the next 24 months.

Corporate profile

Ingersoll-Rand is tax-domiciled in Ireland but run from its U.S. headquarters in Davidson, N.C. Its climate segment (79% of sales) delivers energy-efficient products via Trane and American Standard heating, ventilation, and air conditioning (HVAC) systems and building-automation products. The firm also provides temperature-controlled transport solutions via its Thermo King brand. The industrials segment (21% of sales) includes compressed air and gas systems and services, power tools, material-handling systems, and fluid-management equipment, as well as Club Car golf and utility vehicles.

Despite economic headwinds in its industrial segments, Ingersoll-Rand has put up decent growth numbers of late. Per-share profits rose 17% in the third quarter to $1.41, handily beating the consensus of $1.29. Revenue of $3.57 billion slightly exceeded the estimate of $3.55 billion. Organic revenue increased 3%, driven by strength in HVAC. The firm estimates that the bulk of its HVAC revenue comes from the aftermarket and replacement business, with new construction representing just 18% of the total North American commercial HVAC market. Any softness in new construction as a result of higher interest rates should have a somewhat muted effect on this business.

While Ingersoll-Rand doesn't necessarily expect a big rebound in its industrial end markets in 2017, it does believe "flattening" industrial markets, easier quarterly comparisons, and further margin gains will drive better results in this segment. Third-quarter operating margins in the industrials segment rose 180 basis points from the trough in the second quarter.

For 2016, the company raised its per-share-profit guidance to $4.17 to $4.22 from $4.00 to $4.10. It expects free cash flow of roughly $1.3 billion, versus previous guidance of $1.0 to $1.1 billion. Free cash flow through the first nine months of the year was $992 million, up $527 million from the year-earlier period. The rising cash flow and expectations for continued solid results no doubt fueled the 25% dividend hike in October. This follows a 10% increase in February.

Conclusion

Yielding 2.1%, Ingersoll-Rand provides a nice combination of current yield, a rising dividend stream, and above-average appreciation potential.

An annual report for Ingersoll-Rand PLC is available at 800-E Beaty St., Davidson, NC 28036, (704) 655-4000, www.ingersollrand.com.

INGERSOLL-RAND
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Sep '16
1.41
vs.
1.21
2%
68.97
-
62.40
17 - 15
Jun '16
1.38
vs.
1.20
2%
67.48
-
59.10
18 - 15
Mar '16
0.50
vs.
0.38
0%
62.48
-
47.08
17 - 13
Dec '15
0.94
vs.
0.82
3%
60.43
-
49.74
17 - 14
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2015
13.30
3.73
1.16
70.93
-
49.74
19 - 13
2014
12.89
3.33
1.00
65.07
-
52.47
20 - 16
2013
12.35
2.67
0.84
71.75
-
48.06
27 - 18
2012
14.03
2.57
0.64
50.03
-
31.24
19 - 12
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
97
86
74
87
54
89
71

   * Earnings exclude special items.
   † Quadrix scores are percentile ranks, with 100 the best.
   NA Not available.


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