Ingersoll Rand: Can It Keep Up Its Bottom-Line Growth?

Over the past three years, the manufacturer grew its earnings by an average of 45.2% per year

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Mar 17, 2023
Summary
  • The company develops and manufactures flow products such as compressors, pumps, blowers and vacuum products.
  • It has mixed fundamentals, including a material amount of debt and a fast-growing bottom line.
  • Longer-term shareholders have enjoyed solid double-digit capital gains.
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Despite many headwinds, including inflation, interest rates and geopolitical uncertainty, Ingersoll Rand Inc. (

IR, Financial) performed well in 2022 and expects growth on its top and bottom lines in 2023. It’s been helped by easing supply chains and a resurgence in manufacturing. At the same time, the company has managed its operations and finances well.

The company specializes in flow creation products for moving air and fluids. In its 10-K for 2022, it claimed to manufacture "the broadest and most complete ranges of compressors, pumps, vacuum and blower products."

In addition, it says its products are of mission-critical quality: “Our products and services are critical to the processes and systems in which they are utilized, which are often complex and the cost of failure or downtime is high.”

Given the high cost of failure or downtime, I expect the company spends more on engineering and quality control. That makes its products less of a commodity and more customized. And, as we know, customized products generally produce better margins, as a manufacturer has more control over pricing.

As this graphic representation of the income statement shows, it operates in two segments. Industrial Technologies and Services includes its flow products, while Precision and Science Technologies focuses on highly specialized pumps and flow control technologies:

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Ingersoll Rand ambitiously seeks acquisition and merger opportunities. In the last three months of 2022, it acquired three companies at a cost of $641.3 million. This, too, can lead to better margins in some cases - directly, if the acquired company is a competitor, or indirectly, if it is a complementary business that provides some competitive advantage.

Its biggest acquisition occurred in 2020 when it combined with Gardner Denver. That led to an increase in its long-term debt, from $1.604 billion at the end of 2019 to $3.859 billion at the end of 2020.

Based in Davidson, North Carolina, the company has a market cap of $21.55 billion and had 2022 revenues of $5.9 billion.

Competition

The industrial end-markets for Industrial Technologies and Services are competitive and, according to the annual filing, the key criteria are product quality, performance, energy efficiency, customer service and local presence. Note that pricing is not a key issue. Named competitors include Atlas Copco AB (

ATLKY, Financial) and Dover Corporation (DOV, Financial).

For Precision and Science Technologies, the top competitive criteria are product quality and performance (most products must be qualified by customers for specific uses). Again, price is not on the list of purchasing criteria. Named competitors include Graco Inc. (

GGG, Financial) and IDEX Corporation (IEX, Financial).

As for competitive advantages, Ingersoll Rand lists "superior customer service" as one of its "primary pillars of future success." It also includes long-term relationships with its customers, its global network of over 1,000 distributors and more than 1,700 patents.

This chart shows how its performance (a gain of 163.98% over the past decade) compares with two of those competitors:

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Future growth

The first thing a company needs if it wants to grow rapidly is free cash flow, and lots of it. Ingersoll Rand has shown an ability to produce that kind of FCF:

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Thanks in part to a big boost in 2020 (Gardner Denver contribution), the company’s free cash flow growth has averaged 40.14% per year over the past nine years.

FCF is just one part of a system that begins with revenue and ends with net income. The company has shown an ability to grow its revenue at an average rate of 17.18% per year:

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To enjoy the fruits of that growth, a company must keep its costs in line. That’s everything from raw materials to labor to taxes. Some of that cost is determined externally and some internally. To make the most of internally controlled costs, Ingersoll Rand has its IRX (Ingersoll Rand Execution Excellence) strategy:

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Source: Ingersoll Rand investor materials

As the image shows, IRX addresses not only cost issues, but also aims to align the company’s culture toward greater effectiveness.

Profit margins give us indications of how well a company manages its costs. Ingersoll Rand is one of the best in the industrial products industry:

In 2022, FCF was $766 million, after capital expenditures of $95 million. Since the company pays only a small dividend and does not repurchase its shares (instead, it has been issuing more of them), that free cash flow is available for growth.

Speaking of share issuances, that also has been a source of cash in the past three years:

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Debt was a source of cash in 2018, 2019 and 2020, but repayment was a use of cash in 2021 and 2022:

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Still, despite all the share issuances and growth, the company continues to carry a significant amount of debt. At the end of 2022, debt consisted of $37 million in short-term debt and $2.716 billion of long-term debt. That leads to an interest coverage ratio of 8.54, which is adequate but hardly inspiring.

All of that taken together, Ingersoll Rand has a large pool of funds that can be used for organic and acquired growth. As we saw above, the company was able to afford $651.2 million in acquisitions in 2022 alone.

The ability to invest and reinvest in growth has driven bottom-line growth averaging 45.2% per year over the past three years, and bottom-line growth drives share prices.

A shareholder’s perspective

Boards of directors, including the one at Ingersoll Rand, are charged with finding a balance between shareholder rewards and continuing growth. Generally, if boards feel they can deliver greater returns by reinvesting than their shareholders would find elsewhere, they put their cash back into the company.

That’s been the case at Ingersoll Rand, where, in 2022, $95 million went into capital expenditures and $32 million into dividends.

For shareholders, the only real source of rewards for this stock, then, is capital gains. For those who have held the stock for the past five years, returns have averaged 18.44% per year. With the dividend adding another 15 basis points, the total return has been 18.59% per year. That is noteworthy, especially after the dilution that occurred through share issuances.

Gurus

That return may be what attracted at least some of the gurus to Ingersoll Rand. Nine of the Premium gurus followed by GuruFocus held Ingersoll Rand stock as of the end of 2022, according to their 13F filings.

Ken Fisher (Trades, Portfolio) of Fisher Asset Management had by far the biggest stake with 4,864,249 shares, after adding 8.43% to the position in the fourth quarter. Steven Cohen (Trades, Portfolio) of Point72 Asset Management owned 327,013 shares, a new holding for him. Mario Gabelli (Trades, Portfolio) of GAMCO Investors reduced his position by 4.87% and finished the year with 149,922 shares.

The company’s stock is very popular with institutional investors, who held 92.22% of the shares outstanding. Insiders own 0.34%.

Investors should be aware that 13F filings do not give a complete picture of a firm’s holdings as the reports only include its positions in U.S. stocks and American depository receipts, but they can still provide valuable information. Further, the reports only reflect trades and holdings as of the most-recent portfolio filing date, which may or may not be held by the reporting firm today or even when this article was published.

Conclusion

Investors searching for an industrial growth stock might want to add Ingersoll Rand to their short lists in my view. The company knows how to grow its bottom line and to generate capital gains for its shareholders. While earnings growth of 45% per year seems too high to be sustainable (unless it makes another acquisition like Gardner Denver), I believe it should be able to deliver robust double digit returns in the coming years.

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Disclosures

I/we have no positions in any stocks mentioned, and have no plans to buy any new positions in the stocks mentioned within the next 72 hours. Click for the complete disclosure
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