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On Oct 8, we initiated our coverage on Ingersoll-Rand Plc (IR - Analyst Report) with a Neutral recommendation. The sideline view is based on its balanced business model, while the stock remains vulnerable to a gross margin pressure and uncertainties regarding its proposed spin-off.

Why Neutral Recommendation?

Ingersoll is one of the leading players in air conditioning systems and services (Trane), transport refrigeration (Thermo King), door hardware (Schlage) and industrial technologies (Club Car) markets. The company continues to focus on improving the efficiencies and capabilities of products and services as it remains optimistic about the U.S. residential new construction markets.

We remain bullish about the company’s position going ahead and expect it to achieve steady improvements in operating profitability with its strong commitments to consistently invest in new products and technologies.

Ingersoll continues to focus on its strategic priorities, which include a disciplined capital allocation, strong and flexible balance sheet position, and cash flows enhancement to support dividend growth. The structural changes in the company are further expected to unlock additional value. We believe that such moves along with its robust operating platform and an efficient management team will help in the execution of these strategic priorities and drive net asset value and dividend growth in the future as well.

Ingersoll has a solid foundation of global brands and commands a leading market share in all major product lines. The geographic and industry diversity coupled with a large installed product base provides ample growth opportunities within service, spare parts and replacement revenue streams. Additionally, the company’s complementary portfolio of products and services is likely to assist Ingersoll in strengthening its market position and achieving high productivity.

Causes for Concern

On the flip side, uncertainties related to the upcoming spin-off of the security business, capital deployment and the $2 billion share repurchase program are deterrents in the short term. The costs related to the proposed spin-off of the security businesses are expected to be in the range of 50 cents to 60 cents per share in fiscal 2013 and additional costs from the early retirement of debt is expected to reduce EPS by 15 cents per share.

In addition, Ingersoll operates in a competitive market place, due to which it has to continually invest in R&D initiatives to stay ahead of competition, thereby increasing its operating costs. Consequently, the company is continually under stress to maintain profitability through stringent cost-cutting measures.

Other Stocks That Warrant a Look

Ingersoll currently carries a Zacks Rank #2 (Buy). Other stocks that are worth a look in the industry include Xylem Inc. (XYL - Analyst Report), Dover Corp. (DOV - Analyst Report) and The Middleby Corp. (MIDD - Analyst Report), each carrying a Zacks Rank #2 (Buy).

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