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Evan Vanderveer

Ingersoll-Rand: The Buffett Review

June 19, 2007 | About:

In the past, I have reviewed the reports of all companies Buffett held in an attempt to see what he found so enticing. Eddie Lampert has said he reviewed reports from the years Buffett bought GEICO and other major holdings for the same reason. I believe studying Buffett’s stock picks to be highly beneficial to all involved.

Ingersoll Rand is in some regards strikingly similar to Tyco, another Berkshire Hathaway holding. Both companies are made up of different industrial segments in unrelated sectors. Berkshire Hathaway (either Buffett or Simpson) purchased Ingersoll Rand in the fourth quarter of 2006.

Ingersoll Rand appeared on the radar of multiple famed value investors during the second half of 2006. In a matter of six months, David Dreman, Mason Hawkins and Brian Rogers bought IR. Like any stock, other firms sold IR at the same time. Regardless, the cluster of buys toward the end of last year tells us that the company was becoming increasingly appealing. We will return to the possible reasoning later.

Like many other top of the line conglomerates, we find brand names buried under the larger company umbrella. The names in the compact vehicle technologies include Bobcat, a small construction vehicle brand, and Club Car, a leading golf cart brand. The revenue and income for the segment decreased 1.5% and 13.8% respectively after a large increase in both the prior year. The company blames the decrease on “lower volumes and product mix”. The Bobcat brand brought about the lower revenues and income likely because of the slowing housing and construction markets. Club Car revenues actually increased 11% on the year.

On May 16 th, the company announced intentions to sell the Bobcat brand and other construction businesses. IR “ said it wanted to move away from being a capital-intensive, heavy-machinery maker and focus on its climate-control, industrial and security businesses”. Options include spinning off the segments to shareholders or selling the specific units.

If anything can be drawn from this segment about Buffett’s buy, we can see another link to the cyclical housing market. Like USG and any other housing related company, Bobcat will eventually rebound to full strength. We should also note Bobcat is a fairly strong brand name in the construction market and will certainly endure the slow down. Club Car will continue to be popular as long as the game of golf remains healthy.

The construction technologies segment appears to be a main component of Berkshire’s purchase. The segment creates road construction and repair equipment, portable power products, general-purpose construction equipment, attachments and portable light towers and compressors. Overall the segment did quite well this past year increasing income by 42.6% and revenue by 16.6%. The company believes the gains were due to “higher volumes and product mix”.

Just recently, IR has agreed to sell the road development unit to AB Volvo for $1.3 Billion in cash. Volvo appears to believe the business will be an asset to the company, ironically the part of IR management is most glad to dispose of.

The third segment, one that is likely to become an even larger contributor to the bottom line, is the Climate Control Technologies. The unit “provides solutions for customers to transport, preserve, store and display temperature-sensitive products”. The line includes everything from beverage coolers to auxiliary power units. Noteworthy brands include Hussmann and Thermo King, neither of which adds any great worth. However, they are both reliable and industry recognizable.

Like the majority of the other IR segments, climate control technologies increased revenues by 11.1% and operating income by 13%. Again, the company attributed the increases to higher volumes and product mix. The statement about growth for each segment is identically. Certainly, stable-growing brands year after year would attract the attention of anyone trying to buy predictable businesses for the long term.

Industrial Technologies makes up the fourth segment and yet another integral part of IR’s future business. The unit “provides solutions to enhance customers’ industrial and energy efficiency” using different mechanical solutions including compressed air systems and energy generation systems. Revenue for the year increased by 11.8% and operating income increased by 16.5%, both highly respectable movements in the right direction.

The Security Technologies segment is likely the least capital-intensive business of all. The unit designs and manufactures everything from standard locks to biometric access control systems. Also included in the group is security and scheduling software. The security brands include Schlage (fairly well known), LCN, VON Duprin and CISA brands. Revenue from security increased by 8.8% and income by 5.1% for the year. In recent releases, the company stated they believe the security technologies segment is be vital to IR’s growth.

Even beyond all of these positive results, CEO Herbert Henkel appears to be a masterful captain. His letter to shareholders is one of the better letters of I have ever come across. He opens by laying out quantitative goals for operating margin, earnings per share growth, return on invested capital, and available cash flow. We can use these goals next year to evaluate IR’s performance. Henkel mentions the company has compounded revenue growth at 9% since two thousand and one, with their 8% to 12% target.

Most important to Buffett was likely the discussion of capital allocation. The primary statement mentioned a few different times is the “strategy to transition away from capital-intense, heavy machinery businesses and improve the company’s efforts to consistently achieve aggressive financial objectives over the long term.” The statement explains the reasoning behind the sale of the road unit.

Buffett in a famed annual letter addresses the leaking boat issue directly:


“Should you find yourself in a chronically-leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching the leaks.”

Henkel appears to be listening and spending his time and energy getting out of not only the sinking “road” vessel, but all other leaking vessels as well. Buffett has experience with leaking boats; his namesake company was a similar business. After a lengthy period of time spent bailing water out of Berkshire Hathaway’s textile business, Buffett pulled the plug. Examining the textile story tells us he would be unlikely to invest in something along the same lines ever again. So when Henkel announced IR was jumping out, Buffett jumped in.

Acquisitions, another component of capital allocation, are also addressed directly in the letter. Henkel tells us since moving away from the capital-intensive businesses seven years ago, IR has acquired sixty-five “bolt on” companies. Further he notes, “In 2006, we reviewed many acquisition candidates, but the majority of these were priced at an unacceptable premium relative to our investment criteria.”

Making all of the above reasons even more attractive is the overall stability of the company’s earnings. The diverse product lines of IR insulate the company from a certain volatile or cyclical market. As mentioned above, the Bobcat brand was significantly impacted by the “sick” housing market. Yet, the company continued to grow. Operating margins as well appear to remain fairly constant over time.

A thorough review shows why Ingersoll Rand would be a good selection for investors looking for stable long-term growth as Buffett is. The company comes equipped with great management and a selection of diverse business segments. While Ingersoll Rand may not be significantly undervalued at current prices, the future of the company looks to be upwards from here.


About the author:

Evan Vanderveer
Charlie Tian, Ph.D. - Founder of GuruFocus. You can now order his book Invest Like a Guru on Amazon.

Rating: 3.1/5 (13 votes)


Vooch - 10 years ago    Report SPAM
I owned ASVI (a possible competitor to Bobcat), but I sold it because it ran up so much (ASVI P/E is now 28 or so). It's one of the few that ran up so quickly I had to sell.

However, Ingersoll-Rand (IR) is a "premier" company. When I started up a plant in Oklahoma and ran a couple plants in Tennessee, the air compressors we used were IR because of their quality. That was about 7 years ago, but I'm sure not much has changed (with IR) since then.

I reviewed IR (as an investment) in Feb 2007, but it didn't pass "my" quantitative metrics. This doesn't mean Buffett overpaid. His qualitative measures seem to supercede (ie. China growth) anything quantitative measures can do.

IR stockholders may preserve/grow their money, but it won't be anything growing fast, imo.

- Vooch

Pault - 10 years ago    Report SPAM
I seem to remember in the annual report that half of the ~10% growth target is supposed to come from acquisitions. Isn't that a risky assumption?
Kfh227 - 10 years ago    Report SPAM
Slow and steady growth .. the way I like it.

Maybe Buffett also likes that IR seems to be focusing on their core competencies?

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