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Ingersoll (IR) Poised for Top-Line Growth, Risks Remain

DHR LUK AIT IR

Trades from $3

On Nov 21, 2016, Zacks Investment Research downgraded Ingersoll-Rand Plc (IR - Free Report) to a Zacks Rank #3 (Hold). Going by the Zacks model, companies holding a Zacks Rank #3 have high chances of performing in line with the broader market in the quarters ahead.

Headquartered in Dublin, Ireland, Ingersoll designs, manufactures, sells and services a diverse portfolio of industrial and commercial products across the globe. From enhancing the quality and comfort of air in homes and buildings to transporting and protecting food and perishables, the product portfolio of the company secures homes and commercial properties and increases industrial productivity and efficiency.

With strong third-quarter 2016 results, Ingersoll raised its full year 2016 guidance for adjusted earnings from continuing operations to $4.17–$4.22 per share from the earlier expectation of $4.00–$4.10. Adjusted free cash flow for the year is estimated to be approximately $1.3 billion, up from $1.0 billion to $1.1 billion projected earlier. Such bullish outlook portrays favorable growth dynamics and gives confidence to investors.

Ingersoll continues to focus on improving the efficiencies and capabilities of products and services within its core businesses. The company also has a solid foundation of global brands and 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 it in strengthening the market position and achieving high productivity.

INGERSOLL RAND Price and Consensus

 

INGERSOLL RAND Price and Consensus | INGERSOLL RAND Quote

In order to further improve its growth curve, Ingersoll is concentrating on its strategic priorities. These 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.

However, Ingersoll continues to reposition its portfolio to focus on high-barrier markets. While such efforts are encouraging, they involve upfront costs which are likely to lead to earnings dilution in the near term. Consequently, the company is continually under stress to maintain profitability through stringent cost-cutting measures.

The company has considerable operations in geographies outside the U.S. Its significant international presence exposes it to political and economic disruptions, all of which can directly impact its profits. This gives rise to some concerns regarding its growth potential in the coming quarters, in the light of macroeconomic and geopolitical turmoil that is afflicting some economies. Presently, with the economy in Europe being unpredictable post the Brexit referendum, it becomes difficult for the company to increase revenues and reduce costs. In addition, Ingersoll is likely to be stifled by the renegotiated deals and restrictions imposed on trade with other European Union members. Brexit could further result in higher tariff and non-tariff barriers to trade between the U.K. and the European Union, lowering productivity of the company.

Stocks to Consider

Some better-ranked stocks include Applied Industrial Technologies, Inc. (AIT - Free Report) , Leucadia National Corporation (LUK - Free Report) and Danaher Corp. (DHR - Free Report) . Applied Industrial and Danaher both carry a Zacks Rank #2 (Buy), whereas Leucadia sports a Zacks Rank #1(Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Applied Industrial has a long-term earnings growth expectation of 12% and is currently trading at a forward P/E of 22.3x.

Danaher has a long-term earnings growth expectation of 11.9% and is currently trading at a forward P/E of 22.0x.

Leucadia National has a long-term earnings growth expectation of 18% and is currently trading at a forward P/E of 95.4x.

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