Ingersoll-Rand (IR, Financial), a $22.6 billion Ireland-based diversified industrial company, reported 5% year-over-year growth in revenue to $6.91 billion and a contrasting (-)47% drop in profits to $475.7 million in the first half, a margin of 6.9% compared to 13.7% in the same period last year.
Operating expenses grew modestly at 5% year over year, but the big dip occurred when Ingersoll-Rand did not record the same amount in other income in this period vs. the $396.8 million it did a year earlier in relation to a divestiture in the company's Hussmann interest.
In addition, Ingersoll-Rand raised its full-year 2017 revenue, earnings per share (EPS) and cash flow guidance. The company's revenues are expected to be up ~4.5% compared with 2016; continuing EPS of ~$4.22 vs. $5.65 in 2016; cash flow from operating activities ~$1.5 billion vs. $1.5 billion in 2016; and free cash flow ~$1.2 billion vs. $1.32 billion in the year prior.
“Financial and operational performance was again strong in the second quarter driven by focused execution of our business strategy.
“Growth in revenue in our Commercial and Residential HVAC businesses was again exceptional and our Industrial segment continued to make solid steady progress growing organic bookings at 5% and expanding operating margins. Our Transport business was down modestly as anticipated. Overall our performance was in line with our internal expectations and gives us further confidence we are on track to deliver against our full-year 2017 EPS guidance and that we are continuing to build a stronger, more durable company over the long term.” – Michael W. Lamach, chairman and CEO
Â
Valuations
Ingersoll-Rand is undervalued compared to peers. According to GuruFocus data, the company had a trailing price-earnings (P/E) ratio of 16 times vs. the industry median of 23 times, a price-book (P/B) ratio of 3.4 times vs. 1.9 times and a price-sales (P/S) ratio of 1.7 times vs. 1.3 times.
The company had trailing dividend yield of 1.74% with 26% payout ratio.
Average 2017 revenue and EPS estimates indicated forward multiples of 1.6 times and 19.5 times.
Total returns
Ingersoll-Rand has greatly outperformed the broader Standard & Poor's 500 index in the past half decade having generated 20.8% (annualized) total returns vs. the index’s 14.7%. So far this year, the company returned 18% vs. the index’s 11.8%.
Ingersoll-Rand
Ingersoll-Rand was founded in 1871. Ingersoll-Rand is a public limited company incorporated in Ireland in 2009.
According to filings, the company and its consolidated subsidiaries is a diversified, global company that provides products, services and solutions to enhance the quality, energy efficiency and comfort of air in homes and buildings, transport and protect food and perishables and increase industrial productivity and efficiency.
Ingersoll-Rand generates revenue and cash primarily through the design, manufacture, sale and service of a diverse portfolio of industrial and commercial products that include well-recognized, premium brand names such as Ingersoll-Rand®, Trane®, Thermo King®, American Standard®, ARO® and Club Car®.
In 2016, the company generated 64.6% of its revenue in the U.S. and the rest in other countries.
Ingersoll-Rand had two segments: Climate and Industrial.
Climate
As per filing, the climate segment globally delivers energy-efficient products and innovative energy services.
The business includes Trane® and American Standard® Heating and Air Conditioning which provide heating, ventilation and air conditioning (HVAC) systems, and commercial and residential building services, parts, support and controls; energy services and building automation through Trane Building Advantage and Nexia; and Thermo King® transport temperature control solutions.
In the first half, revenue in the climate business grew 6.2% year over year to $5.47 billion (79% of sales) and segment income margins of 13.6% compared to 13.9% in the year prior period.
Industrial
Industrial segment delivers products and services that enhance energy efficiency, productivity and operations.
The business includes compressed air and gas systems and services, power tools, material handling systems and ARO® fluid management equipment as well as Club Car ®golf, utility and consumer low-speed vehicles.
In the first half, revenue in the industrial segment grew 0.5% year over year to $1.44 billion (21% of sales) and registered margins of 11% vs. 9.4% in the prior year.
Sales and profits
In the past three years, Ingersoll-Rand logged revenue growth average of 3%, profit increase average of 33.6% and profit margin average of 7.72%.
Cash, debt and book value
As of June, Ingersoll-Rand had $1.31 billion in cash and cash equivalents and $4.07 billion in debt with debt-equity ratio of 0.6 times vs. 0.64 times in the year prior. Overall debt fell by $20 million year over year while equity rose by $307 million.
Of Ingersoll-Rand’s $17.8 billion assets 53.6% were identified as goodwill and intangibles while book value has grown 4.9% year over year to $6.8 billion.
Cash flow
In the first half, Ingersoll-Rand’s cash flow from operations dropped by 5.3% year over year to $405.5 million. Capital expenditures were $79.5 million leaving the company with $326 million in free cash flow compared to $345 million a year earlier.
Meanwhile, the company allocated 2.4 times its free cash flow to shareholder payouts including buybacks and dividends. The company also took in $26.9 million in debt net repayments made and costs.
The cash flow summary
In the past three years, Ingersoll-Rand allocated $667 million in capital expenditures, generated $2.66 billion in free cash flow, raised $124 million in share issuances and $614 million in debt issuances net repayments and provided $2.8 billion in dividends and share repurchases resulting in 120% free cash flow payout average.
Conclusion
Ingersoll-Rand demonstrated steady business growth as of its recent first-half operations. In addition, the company expects better overall revenue and cash flow performance by year end. Meanwhile, the company carried a moderately leveraged balance sheet at 0.6 times and good amount of blue sky elements in its assets at 54%.
Nonetheless, Ingersoll-Rand has kept generous payouts to its shareholders in the forms of buybacks and dividends in recent years.
Analysts have an average price target of $96.06 per share vs. $88.54 at the time of writing. Applying three-year revenue growth, P/S averages and 15% margin indicated $62.2 per share figure.
Ingersoll-Rand is a weak buy with a $94 per share price target.
Disclosure: I do not have shares in any of the companies mentioned.
