After three straight years of nothing but broken analyst earnings estimates, Ingersoll-Rand (NYSE:IR) finally dropped the ball last quarter, and merely met Wall Street's expectations. When the diversified industrial manufacturer returns to the Street Friday morning to report its third-quarter 2006 numbers, will it be a return to its former greatness, or something less impressive?

What analysts say:

  • Buy, sell, or waffle? Seventeen analysts follow Ingersoll, giving the firm seven buy ratings, eight holds, and a pair of sells.
  • Revenues. On average, they expect sales to rise 8.5% year over year to $2.65 billion.
  • Earnings. And predict profits will come in 12.5% better at $0.72 per share.

What management says:
According to a press release issued two weeks ago, Ingersoll may be hit with as much as $217 million in back taxes and penalties, arising out of an IRS audit of the firm's 1999-2000 tax returns. Although the company disputes the IRS' findings, it will be taking an $0.08 per-share charge to earnings to increase its reserves in case it must pay up. Also, further down the road, payment of the full assessed amount would reduce free cash flow by as much as $155 million in the quarter in which payment is made.

Aside from this issue, things seem to be going quite well. CEO Herbert Henkel, writing in the firm's Q2 earnings release, described how Ingersoll has transformed itself from a "capital-intense, heavy-machinery" company into a "multi-brand commercial products manufacturer." Following up on the theme we discussed in last quarter's Foolish Forecast, he also noted how the firm is using its size and operating efficiencies to "significantly offset materials price increases."

What management does:
Call me superficial, but I can't help but admire the round-number consistency of this business. For three straight quarters, Ingersoll has produced trailing-12-month results that work out to an even 10% net margin.

(Reminder: Ingersoll benefited from a one-time credit from discontinued operations in Q4 2004. This temporarily inflated its numbers in the first three quarters shown on the table below.)

Margins %

3/05

6/05

9/05

12/05

3/06

6/06

Gross

26.9

26.9

26.9

26.6

26.6

26.7

Op.

12.2

12.3

12.6

12.9

13.2

13.4

Net

13.0

12.6

12.4

10.0

10.0

10.0
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

This Fool says:
Much as I love the round numbers on the bottom line, let's also take a moment to glance higher up on the income statement. There we see that year-to-date sales have grown 10.2% versus the first half of 2005. And while Henkel trumpets the horn of operating efficiency -- and it's true that selling, general, and administrative costs grew just 4.4% year to date (superb performance) -- we should also note that the firm's raw materials costs are finally growing slower than its sales.

The difference during the period has only been 20 basis points, granted, but still, what we're seeing here is a company enjoying the best of both worlds. On the one hand, exploding raw material costs taught Ingersoll to work more efficiently to offset those higher input costs. Meanwhile, raw material costs are now slackening -- giving the company improved results in both gross and operating margins. Can't beat that with a stick.

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Relive the heady days leading up to and following Ingersoll-Rand's previous quarters in:

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Fool contributor Rich Smith does not own shares of any company named above.