The Facts You Need on Ingersoll-Rand

It's critically important that investors do their homework: Choosing the right stocks requires due diligence and thorough analysis to ensure that you won't regret your decision. Unfortunately, we all have missed the mark from time to time in what we do -- even here at the Fool.

Recently, when analyzing August's Purchasing Managers Index, I referenced industrial conglomerate Ingersoll-Rand (NYSE: IR  ) as a company that could be threatened by a decline in domestic construction spending. That would be true -- if Swedish manufacturer Volvo hadn't purchased the company's construction equipment division back in 2007, leaving Ingersoll-Rand with far less to fret about.

That, ladies and gentlemen, is a perfect example of the critical value of doing your homework: The wrong information can lead to mistakes. That being said, let's now take a look at where exactly Ingersoll-Rand excels -- and how it might fit in your portfolio.

Handling a long run
Founded in 1871 and listed on the NYSE since the early 1900s, Ingersoll-Rand has a lot of experience in manufacturing. The Dublin-headquartered company sports a truly global business, selling its wares to over 100 countries. Indeed, the manufacturer boasted more than 40% of 2011 net revenues from non-U.S. sales, providing strong geographic diversification and a global foothold for future revenue sources.

The manufacturer operates four primary business segments in climate solutions, primarily involving HVAC units; residential solutions, which cater to homeowners through a number of household products and services; security technologies; and industrial technologies. Ingersoll-Rand operates a number of household names among its list of brands and subsidiaries, including the likes of American Standard and Thermo King.

Investors should expect an amount of cyclical sales and seasonality from Ingersoll-Rand; naturally, HVAC products cater to specific environmental circumstances. You shouldn't take one-quarter of the company as a representative stand-in for its whole.

Nonetheless, ignoring Ingersoll-Rand's impressive performance over the past year would be passing up a 38% gain. To make up your mind, you need to know the financial details on where this stock's heading.

Financial depth
Ingersoll-Rand's most recent earnings release put a smile on the faces of its shareholders. The report, released in July, outlined Q2 earnings per share of $1.15 -- destroying analyst estimates of $0.91 per share. Revenue came in slightly lower than expected and declined 7% year over year, however. Operational efficiency truly drove the quarterly success. While revenues declined, operating income jumped from $299 million in Q2 2011 to $478 million in 2012.

You might find the stock a tad on the expensive side with a P/E of 18.7 -- when compared against cheaper competitors, such as Johnson Controls' (NYSE: JCI  ) P/E of 11 -- but Ingersoll-Rand's earnings growth has fueled the stock's success. In recent quarters, net income growth exceeded the average for competitors in the machinery industry and the broader S&P 500, leading analysts to estimate more than 12% average annual revenue growth for the next half-decade. At this rate, Ingersoll-Rand's forward P/E clocks in at just 12.7.

What's most impressive about the company's financial profile is its debt management. With a long-term debt-to-equity ratio of just 0.39, the company's debt load looks incredibly modest compared to the industry average of 1.45. Keep in mind, this is an industry well-known for high debt and capital-intensive projects. Such financial soundness will provide the company more room to flex its muscle and take on new projects in the future, a promising sign for shareholders.

The company's little details add an extra edge to its financial gloss. Operational efficiency has picked up yearly since 2009, with cost of goods sold shrinking from 72.5% of revenues in 2009 to only 71% in 2011, according to the company's most recent annual report. Selling and administrative expenses have similarly declined over that time frame, down to 18.8% from 20.7% with decreases each year. That edge should give investors confidence in the company's direction as it continues to hone efficient processes.

A few concerns linger for wary investors. Ingersoll-Rand's superb growth masks net margins of 5.5% and operating margins of 10.5% that underperform industry averages. The company one-ups some competitors in that regard, however, such as the aforementioned Johnson Controls' 4% net margin. Furthermore, although the company posts a 1.4% dividend, its five-year-growth rate of -11.6% shouldn't attract investors looking solely for income. Finally, Ingersoll-Rand's backlog of orders did shrink in 2011, down to less than $2.1 billion from nearly $2.3 billion the prior year.

Beating the street
Still, the myriad of positives outweighs the few negatives on this pick. Ingersoll-Rand's impressive growth and excellent management of debt should clue you in on this company's upward track. If it keeps up this trend, any concern around those margins will disappear in a hurry -- and investors getting in now will look smart as they reap their rewards. The stock may be trading near its 52-week high, but the outlook for Ingersoll Rand is no less promising after breaking down the various components of this diversified manufacturer.

Heady investors may want to jump in with Ingersoll-Rand's rise, but make sure to explore all your options when diversifying your portfolio. To take a look at what the market's top names are snapping up, check out The Motley Fool's free report, "The Stocks Only the Smartest Investors Are Buying." Anyone can make market-beating stock picks with the right information; ensure you have that edge and get your free copy by clicking here.

Fool contributor Dan Carroll holds no positions in the stocks mentioned in this article. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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  • Report this Comment On September 21, 2012, at 1:09 PM, chunkylover53 wrote:

    I thought the recent stock price rise was due to speculation that Ingersoll Rand would be broken up in the future. No mention of that in this article, though.

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