Ingersoll Rand (IR, Financial) is a diversified, global company that provides products, services and solutions to enhance the quality and comfort of air in homes and buildings, transport and protect food and perishables, secure homes and commercial properties, and increase industrial productivity and efficiency. Its business segments consist of climate solutions, residential solutions, industrial technologies and security technologies, each with strong brands and leading positions within their respective markets. It generates revenue 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 Club Car, Ingersoll Rand, Schlage, Thermo King and Trane.
Valuation
IR is currently trading at a trailing twelve months P/E of 14.74 and a trailing twelve months EV/EBITDA of 9.19. IR delivered an ROE of 13.8% over the past twelve months.
Financial and Business Risks
IR has a moderate gross debt-to-equity ratio of 44% with a net gearing of 32%. This is not helped by a weak interest coverage ratio of 3.2 and a quick ratio of 0.87. Off-balance sheet liabilities include purchase obligations and operating leases amounting to $903 million and $469 million respectively.
IR's business is not dependent upon a single customer or a small group of customers, with no single
customer accounting for more than 10% of its 2011 revenues.
IR enters into long-term supply contracts in order to manage exposure to potential supply disruptions. Significant changes in certain material costs such as steel and non-ferrous metals have created pricing pressures in some of its businesses in the past.
Business Quality and Capital Allocation
IR has delivered sustained performance with a proven innovation strategy. Management estimates about
$3.5 billion of 2011 revenue was generated from innovations introduced in the last three years. Investments in innovation have doubled to 25% of sales in 2012, compared with that in 2008. For example, Thermo King launched the Precedent platform to address new Tier IV regulations for engine emissions. Precedent sets a new industry standard in both fuel efficiency and emissions control by delivering double-digit fuel savings.
IR is focused on operational excellence. In the fourth quarter of 2008, IR initiated enterprise-wide restructuring actions in order to streamline both its manufacturing footprint and general and administrative cost base. The results of the restructuring actions include a 30% reduction (square footage) in manufacturing footprint and significant reduction in back office costs. This is reflected in a 28% increase in revenue per employee from $228,000 in 2009 to $269,000 in 2011, and a 4% increase in operating margins compared with a corresponding 2.4% increase in operating margins for the diversified industrials peer group for the past three years.
IR has paid consecutive quarterly cash dividends on its common shares since 1919 and annual dividends since 1910 and sports a current dividend yield of 1.3% with a corresponding dividend payout ratio of 17%. It has plans to increase its dividend payout ratio to 30%. IR resumed share buybacks in June 2012, repurchasing 10.8 million shares for $480 million. It expects to complete the current $2 billion share repurchase authorization with $840 million spent in 2012.
Conclusion
The 10.5% operating margin for the trailing twelve months represents the first time that IR has reached double-digit operating margins since 2007. In addition, the presence of an activist investor like Nelson Peltz and active share buybacks have brightened up the prospects for the stock. Unfortunately, the share price has largely factored in the positive news.
Disclosure
The author does not have a position in any of the stocks mentioned.
Valuation
IR is currently trading at a trailing twelve months P/E of 14.74 and a trailing twelve months EV/EBITDA of 9.19. IR delivered an ROE of 13.8% over the past twelve months.
Financial and Business Risks
IR has a moderate gross debt-to-equity ratio of 44% with a net gearing of 32%. This is not helped by a weak interest coverage ratio of 3.2 and a quick ratio of 0.87. Off-balance sheet liabilities include purchase obligations and operating leases amounting to $903 million and $469 million respectively.
IR's business is not dependent upon a single customer or a small group of customers, with no single
customer accounting for more than 10% of its 2011 revenues.
IR enters into long-term supply contracts in order to manage exposure to potential supply disruptions. Significant changes in certain material costs such as steel and non-ferrous metals have created pricing pressures in some of its businesses in the past.
Business Quality and Capital Allocation
IR has delivered sustained performance with a proven innovation strategy. Management estimates about
$3.5 billion of 2011 revenue was generated from innovations introduced in the last three years. Investments in innovation have doubled to 25% of sales in 2012, compared with that in 2008. For example, Thermo King launched the Precedent platform to address new Tier IV regulations for engine emissions. Precedent sets a new industry standard in both fuel efficiency and emissions control by delivering double-digit fuel savings.
IR is focused on operational excellence. In the fourth quarter of 2008, IR initiated enterprise-wide restructuring actions in order to streamline both its manufacturing footprint and general and administrative cost base. The results of the restructuring actions include a 30% reduction (square footage) in manufacturing footprint and significant reduction in back office costs. This is reflected in a 28% increase in revenue per employee from $228,000 in 2009 to $269,000 in 2011, and a 4% increase in operating margins compared with a corresponding 2.4% increase in operating margins for the diversified industrials peer group for the past three years.
IR has paid consecutive quarterly cash dividends on its common shares since 1919 and annual dividends since 1910 and sports a current dividend yield of 1.3% with a corresponding dividend payout ratio of 17%. It has plans to increase its dividend payout ratio to 30%. IR resumed share buybacks in June 2012, repurchasing 10.8 million shares for $480 million. It expects to complete the current $2 billion share repurchase authorization with $840 million spent in 2012.
Conclusion
The 10.5% operating margin for the trailing twelve months represents the first time that IR has reached double-digit operating margins since 2007. In addition, the presence of an activist investor like Nelson Peltz and active share buybacks have brightened up the prospects for the stock. Unfortunately, the share price has largely factored in the positive news.
Disclosure
The author does not have a position in any of the stocks mentioned.
