Diversified industrial manufacturer Ingersoll-Rand (NYSE:IR) reports Q1 2006 earnings results tomorrow morning. Want to know what Wall Street expects to see? Read on. Want to know what really matters? Read on a bit more.
What analysts say:
- Buy, sell, or waffle? Sixteen analysts follow Ingersoll, splitting their ratings down the middle: Half say buy; half say hold.
- Revenues. Sales are expected to rise 8% year over year, to $2.65 billion.
- Earnings. Profits are predicted to do even better, with the consensus being 12% growth and $0.72 per share.
What management says:
In February, Ingersoll CEO Herbert Henkel made some pretty bold assertions about his company (but after 11 consecutive quarters of crushing analyst estimates, you can't blame the guy for being confident). Citing "strong revenue growth," "improved operating margins," and "earnings from continuing operations," he pronounced Ingersoll-Rand "well-positioned to . [achieve] consistent earnings growth in all economic conditions." The company is targeting long-term revenue growth of 8% to 12% and earnings growth of 12% to 15%.
What management does:
With Henkel focusing on operating performance, let's ignore the fact that Ingersoll's rolling net margin at last report was hardly improved at all from where it was 18 months ago. Focusing instead on operating margins, we see that Henkel is calling things pretty accurately. Although gross margins have been eroded somewhat (a result of cost of goods sold rising faster than sales), the firm nonetheless improved its average operating margin by 150 basis points over the last year and a half.
|
Margins % |
9/04 |
12/04 |
3/05 |
6/05 |
9/05 |
12/05 |
|---|---|---|---|---|---|---|
|
Gross |
26.9 |
27 |
26.9 |
26.9 |
26.9 |
26.6 |
|
Op. |
11.4 |
11.8 |
12.3 |
12.6 |
12.9 |
12.9 |
|
Net |
9.8 |
13 |
13 |
12.6 |
12.4 |
10 |
This Fool says:
That's not necessarily the whole story at Ingersoll, however. For example, while Ingersoll's "accounting profits" are indeed impressive -- at $1.8 billion total over the last 18 months -- the firm's "cash profits," or free cash flow, have amounted to less than $1.2 billion over the same period. This is due in part to the fact that Ingersoll's accounts receivable and inventories have both grown faster than sales. For example, over the last six months, A/R grew 12%, inventories 13%, but sales just 10%. Investors monitoring Ingersoll's success in hitting its profits growth target should keep the current situation in mind, and remember to also evaluate the quality of those profits.
Related companies:
- ASV (NASDAQ:ASVI)
- Capstone Turbine (NASDAQ:CPST)
- Caterpillar (NYSE:CAT)
- Cummins (NYSEL CMI)
- Tyco (NYSE:TYC)
- Toro (NYSE:TTC)
Tyco is an Inside Value recommendation.
Fool contributor Rich Smith does not own shares of any company named above.
