Summary
- Ingersoll Rand continues to go from strength to strength, defying its valuation.
- 12%+ bottom line growth is expected in fiscal 2023.
- We look at balance sheet trends to assess if growth rates are feasible.
Intro
We wrote about Ingersoll Rand Inc. ( IR ) back in May of last year when we stated that prices may need to consolidate for some time to allow the stock's valuation to catch up. Well, Ingersoll was having none of it and has actually rallied close to 20% since we penned that piece over 8 months ago. That is a serious return considering the S&P has returned less than 1.5% over the same time frame.
If fact, when we compare Ingersoll's 2-year chart with the company's growth metrics, it becomes clear why the market continues to be attracted to this company. Top line sales, for example, have grown from $1.12 billion in Q3 of 2020 to $1.52 billion in Q3 of this present fiscal year. Operating income has grown from $115 million eight quarters ago to $203 million in Ingersoll's most recent quarter.
Suffice it to say, irrespective of the stock's valuation, Ingersoll Rand continues to impress the market from a growth standpoint, whether growth comes through organic growth or inorganic growth through strategic bolt-on acquisitions . Management actually cited 6 new acquisitions on the company's latest earnings call which have come on stream and how they will play into the company's growth story.
Being aggressive is one thing but keeping the balance sheet in check in a strong M&A environment can be difficult even in the best of times. Therefore, let's go through how the company's financial condition has changed over the past eight quarters. Ingersoll Rand's balance sheet and trends of its key line items can help us in this endeavor.
Cash & Short-Term Investments
Cash and ST investments have risen by roughly $177 million over the past eight quarters. Generally, the higher the cash balance the better, as this gives Ingersoll Rand stock more options with respect to its ongoing aggressive M&A strategy or rewarding shareholders through dividend payments and share buybacks. Protection of the company's cash balance is derived from sustained cash flow generation over time. In the company's most recent quarter, $274 million of generated operating cash flow resulted in over $150 million being added sequentially to balance sheet cash.
Current Ratio
Many times, liquidity levels can be sacrificed in the quest for elevated levels of forward-looking growth. As mentioned above, EBIT has almost doubled over the past eight quarters, so it is important to study the company's current assets and current liabilities to make sure liquidity has not been impaired. The reason being is that the current ratio is an excellent read on whether short-term obligations are fundable over the forthcoming 12 months. The current ratio is calculated by dividing the company's current assets by its corresponding current liabilities. At the end of Q3, Ingersoll Rand's current ratio came in at 2.45 which means it is up both sequentially and compared to the company's third quarter in fiscal 2020.
Long-Term Assets
The two biggest line items by far in Ingersoll Rand's non-current asset section are its goodwill and intangible assets. Goodwill is essentially the "fat" paid over book value on past acquisitions while intangible assets are patents, trademarks, brands, etc., which have been bought from a third party. At the end of IR's most recent quarter, goodwill came in at $5.79 billion, whereas intangible assets arrived at $3.54 billion. Therefore, the sum of both of these line items came in at $9.32 billion, which actually is $1.6 billion lower (combined) over the same quarter of 24 months prior. Currently, IR's goodwill and intangible assets make up 66% of the total asset take ($14.225 billion).
A few points of note on the above trends. Whereas goodwill has been holding up pretty well, intangible assets have lost over $1.2 billion or 26% over the past 24 months alone. Therefore, sustained annual declines will more than likely continue in intangibles, which will obviously decrease the overall asset base. On the goodwill side, there is no getting away from the fact that the $5.79 billion makes up a very elevated 40%+ of IR's total asset take. Results though have been encouraging since the merger , which means that elevated goodwill is not under pressure at this stage.
Long-Term Debt
Long-term debt came in at $2.7 billion at the end of Q3 , which means it has decreased by over $1.1 billion over the past four quarters. Furthermore, the number of shares outstanding dropped by over 12 million shares in this period, with shareholder equity or book value remaining more or less flat during this period ($8,815 billion at the end of Q3). Suffice it to say, IR's debt-to-equity ratio continues to drop (0.3 in the company's most recent quarter). Therefore, although equity has remained pretty flat over the past 2 years, that decreasing share count has resulted in IR's stated book value per share actually rising to $21.61 at the end of Q3.
Conclusion
There are a number of takeaways from going through Ingersoll Rand's balance sheet and associated trends. For one, liquidity and solvency trends remain encouraging as both current assets and operating profit easily surpass current liabilities and interest expense, respectively. The risk to IR's balance sheet revolves around its high goodwill and intangible assets line items. These line items presently are not an issue for the market because the growth is there in spades at present to account for them. Let's see what Q4 earnings bring. We look forward to continued coverage.
For further details see:
Ingersoll Rand: Balance Sheet Trends By The Numbers