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Why Is Ingersoll-Rand (IR) Up 3.1% Since Last Earnings Report?

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It has been about a month since the last earnings report for Ingersoll-Rand (IR - Free Report) . Shares have added about 3.1% in that time frame, underperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Ingersoll-Rand due for a pullback? 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 catalysts.

Ingersoll-Rand Beats Q3 Earnings and Sales Estimates

Ingersoll-Rand reported better-than-expected results for the third quarter of 2019, with earnings surpassing estimates by 4.2%.

Adjusted earnings in the quarter under review were $1.99 per share, surpassing the Zacks Consensus Estimate of $1.91. Also, the bottom line grew 13.7% from the year-ago quarter figure of $1.75 on solid revenue growth, margin expansion and lower share count.

Revenues Improve Y/Y

Ingersoll-Rand’s net sales were $4,344.3 million in the third quarter, reflecting 7.8% growth from the year-ago quarter. Organic sales in the quarter grew 6% year over year, while acquisition had a positive 3% impact. However, unfavorable movements in foreign currencies had an adverse impact of 1%.

The company’s revenues surpassed the Zacks Consensus Estimate of $4,284 million by 1.4%.

Bookings in the quarter rose 3% year over year to $4,162 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 $3,470.9 million, accounting for roughly 79.9% of net revenues in the reported quarter. Sales grew 7.2% year over year on 8% 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 rose 0.9% year over year (or up roughly 2% organically) to $3,269 million.

Industrial’s revenues totaled $873.4 million, representing 20.1% of net revenues in the quarter under review. On a year-over-year basis, the segment’s revenues grew 10.2% on gains of 12% from acquisitions, partially offset by a 2% adverse impact of unfavorable movements in foreign currencies. Organic revenues were flat in the quarter.

The segment’s bookings in the quarter under review grew 10.5% year over year (or flat organically) to $894 million.

Operating Margin Improves Y/Y

In the reported quarter, Ingersoll-Rand’s cost of sales rose 8% year over year to $2,935.8 million. Cost of sales was 67.6% of the quarter’s net sales versus 67.4% in the year-ago quarter. Selling & administrative expenses rose 8.2% year over year to $785.3 million. It represented 18.1% of net sales in the reported quarter.

Adjusted operating profit grew 12.7% year over year to $684.4 million. Margin grew 70 bps year over year to 15.8%. Margin improvement was driven by favorable pricing, volume growth and better productivity, partially offset by unfavorable product mix, tariffs, other inflationary pressures and growth investments.

Interest expenses in the quarter under review rose 32.2% year over year to $64.1 million. Effective tax rate in the quarter was 19.7%.

Balance Sheet & Cash Flow

Exiting the third quarter, Ingersoll-Rand had cash and cash equivalents of $830.9 million, down 5.1% from $875.6 million recorded in the last reported quarter. Long-term debt was flat sequentially at $4,921.9 million.

In the first three quarters of 2019, the company generated net cash of $1,089.8 million from continuing operating activities, roughly 15.2% above the year-ago period. Capital expenditure totaled $186.2 million versus $251.2 million in the previous year’s comparable period. Free cash flow rose 37.1% year over year to $992.7 million.

During the first three quarters of 2019, the company distributed $383.1 million as dividend payouts and repurchased shares worth $500.1 million.

Outlook

For 2019, Ingersoll-Rand anticipates gaining from strengthening HVAC markets, and effective operating system and execution capabilities. Also, weakness in industrial spending will be dealt with efficiently.

The company anticipates revenues growth of 5.5-6.5% for 2019, including roughly 1.5% contribution from the Precision Flow Systems buyout (done in the second quarter of 2019). Organic sales growth projection is maintained at 5-6%.

Adjusted earnings per share are predicted to be roughly $6.40 (guidance maintained). Effective tax rate (adjusted) will likely be 20-21%, lower than previously mentioned 21-22%.

Free cash flow conversion will be more than 100%. Also, the company is working toward combining its Industrial segment with Gardner Denver Holdings, Inc., which is likely to be completed in 2020. This is expected to help Ingersoll-Rand create more value for shareholders by forming a company dedicated to climate solutions.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month.

VGM Scores

Currently, Ingersoll-Rand has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. 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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