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Why Is Ingersoll-Rand (IR) Down 5% Since Last Earnings Report?

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A month has gone by since the last earnings report for Ingersoll-Rand (IR - Free Report) . Shares have lost about 5% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Ingersoll-Rand due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Ingersoll-Rand Tops Q2 Earnings Estimates, Raises View

Ingersoll-Rand kept its earnings streak alive in the second quarter of 2019, with earnings surpassing estimates by 2%. This was the company’s tenth consecutive quarter of better-than-expected results.

Adjusted earnings in the quarter under review were $2.09 per share, surpassing the Zacks Consensus Estimate of $2.05. Also, the bottom line increased 13% from the year-ago figure of $1.85 on solid revenue growth and margin expansion.

Segmental Performance Drives Revenues

Ingersoll-Rand’s net sales were $4,527.8 million in the second quarter, reflecting 3.9% growth from the year-ago quarter. Organic sales in the quarter grew recorded 4% year over year while acquisition had a positive 1% impact. However, unfavorable movements in foreign currencies had adverse impact of 1%.

However, the company’s revenues lagged the Zacks Consensus Estimate of $4,579 million by 1.1%.

Bookings in the quarter decreased 2% year over year to $4,446 million.

The company reports revenues under two market segments. A brief discussion of the quarterly results is provided below:

The Climate segment generated revenues of $3,617.6 million, accounting for roughly 79.9% of net revenues in the reported quarter. Sales grew 3.5% year over year on 5% growth in organic sales. Healthy growth in heating, ventilation and air conditioning (HVAC) markets boosted organic sales. Forex woes had an adverse 1% impact on sales.

The segment’s bookings in the quarter under review decreased 5% year over year (or declined roughly 4% organically) to $3,533 million.

Industrial’s revenues totaled $910.2 million, representing 20.1% of net revenues in the quarter under review. On a year-over-year basis, the segment’s revenues grew 5.4% on gains of 2% from organic sales and 6% from acquisitions, partially offset by 3% adverse impact of unfavorable movements in foreign currencies.

The segment’s bookings in the quarter under review increased 11% year over year (or grew 8% organically) to $913 million.

During the second quarter, the company acquired Precision Flow Systems for $1.45 billion. This buyout will likely help in strengthening the company’s existing fluid management business through technical expertise, and the addition of about 1,000 workers and strong manufacturing units.

Operating Margin Improves Y/Y

In the reported quarter, Ingersoll-Rand’s cost of sales increased 4.4% year over year to $3,094.1 million. Cost of sales was 68.3% of the quarter’s net sales versus 68% in the year-ago quarter. Selling & administrative expenses expanded 4% year over year to $783.2 million. It represented 17.3% of net sales in the reported quarter.

Adjusted operating profit increased 9.7% year over year to $710.1 million. Margin grew 80 bps year over year to 15.7%. Margin improvement was driven by favorable pricing, volume growth and better productivity, partially offset by tariffs, other inflationary pressures and growth investments.

Interest expenses in the quarter under review increased 28.6% year over year to $64.7 million. Effective tax rate in the quarter was 20.4%, down from the year-ago figure of 21.3%.

Balance Sheet & Cash Flow

Exiting the second quarter, Ingersoll-Rand had cash and cash equivalents of $875.6 million, down 54.1% from $1,907.4 million recorded in the last reported quarter. Long-term debt decreased 5.9% sequentially to $4,920.6 million.

In the first half of 2019, the company generated net cash of $421.6 million from continuing operating activities, roughly 1.7% above the year-ago period. Capital expenditure totaled $116.7 million versus $163.4 million in the previous year’s comparable period. Free cash flow increased 26.7% year over year to $344.7 million.

During the first half of 2019, the company distributed $259.4 million as dividend payouts and repurchased shares worth $250 million.

Outlook

For 2019, Ingersoll-Rand anticipates gaining from strengthening HVAC markets, and effective operating system and execution capabilities. Also, headwinds from tariffs and inflation will be dealt with efficiently.

The company anticipates revenues to increase 5.5-6.5%, higher than the earlier projection of 4-5%. The revised projection includes roughly 1.5% (or $250 million) contribution from the Precision Flow Systems buyout. Organic sales growth is maintained at 5-6%.

Adjusted earnings per share are predicted to be roughly $6.40 compared with the previously stated $6.35. Effective tax rate (adjusted) will likely be 21-22%.

The company expects to buy back shares worth $500 million in the year. Free cash flow conversion will be more than 100%. Also, the company noted that it is working toward combining its Industrial segment with Gardner Denver Holdings. The separation, likely to be completed in 2020, will help Ingersoll-Rand to create more value for shareholders by forming a company dedicated to climate solutions.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision.

VGM Scores

At this time, Ingersoll-Rand has a nice Growth Score of B, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Ingersoll-Rand has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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