2023-05-29 05:10:47 ET
Summary
- Ingersoll Rand pays out a small dividend, which allows them to utilize FCF to grow.
- The company has outperformed the S&P 500 over the past 5 years.
- Optimization of Ingersoll's portfolio has enabled the company to expand margins and grow exponentially.
- Assuming my DCF figures, Ingersoll is currently undervalued, resulting in a buy rating.
Ingersoll Rand Inc. ( IR ) has exemplified strong growth, creating a company that is built for the long term. I believe Ingersoll Rand is a buy due to its small dividend which creates large FCF availability, the company's optimization of its portfolio to expand margins, and undervaluation assuming my DCF figures.
Business Overview
Ingersoll Rand Inc. is a global provider of mission-critical technologies in air, fluid, energy, specialty vehicle, and medical sectors across various regions. The company operates through two main segments: Industrial Technologies and Services, and Precision and Science Technologies.
Under the Industrial Technologies and Services segment, Ingersoll Rand designs, manufactures, markets, and services air and gas compression products, vacuum and blower products, fluid transfer equipment, loading systems, power tools, lifting equipment, and associated aftermarket parts and services. These offerings are marketed under well-known brands such as Ingersoll Rand, Gardner Denver, Nash, CompAir, Elmo Rietschle, Robuschi, EMCO Wheaton, and Runtech Systems.
In the Precision and Science Technologies segment, Ingersoll Rand specializes in the design, manufacturing, and marketing of various pumps (diaphragm, piston, water-powered, peristaltic, gear, vane, progressive cavity, and syringe), gas boosters, hydrogen compression systems, automated liquid handling systems, odorant injection systems, controls, software, and related components and accessories. These products cater to critical applications in industries such as medical, life sciences, industrial manufacturing, water and wastewater, chemical processing, energy, food and beverage, and agriculture. The segment operates under brand names such as Air Dimensions, Albin, ARO, Dosatron, Haskel, LMI, Maximus, Milton Roy, MP, Oberdorfer, SEEPEX, Thomas, Welch, Williams, YZ, and Zinsser Analytic.
Above & Beyond Compression
Ingersoll Rand Inc., with a market capitalization of $23.82 billion, has achieved a return on invested capital of 6%. The stock has reached a 52-week high of $61.06 and a low of $39.28. Currently trading at $58.89, Ingersoll Rand's price reflects its proximity to the 52-week high. The company's price-to-earnings ratio based on GAAP stands at 37.25, suggesting a relatively higher price compared to industry peers, as displayed below.
Ingersoll Rand also offers a dividend yield of 0.14%, demonstrating a conservative payout ratio of 4.94%. This prudent approach ensures the company has sufficient free cash flow to support its growth and maintain competitiveness over the long term. As Ingersoll Rand continues to expand and reach a larger scale, it may face challenges in achieving rapid growth. However, this steady dividend payout could potentially increase in the future, providing additional value to shareholders.
In Q1 2023 , Ingersoll Rand surpassed expectations with impressive results both in terms of revenue and earnings per share. They achieved a $0.13 beat on earnings per share at $0.65 and exceeded revenue expectations by $140 million at $1.63 billion, showcasing a significant year-over-year growth of 21.6%. This outstanding performance reflects Ingersoll Rand's ability to outperform the market even during challenging economic conditions. Moreover, the company has raised its full-year 2023 organic revenue growth range by 300 basis points to 6% to 8%, and the total revenue growth range to 10% to 12%. Additionally, Ingersoll Rand has increased its Adjusted EBITDA guidance to a range of $1.66 billion to $1.71 billion, representing a 16% to 19% growth over the previous year. This positive outlook also translates into an adjusted EPS guidance range of $2.64 to $2.74, reflecting an 11% to 16% increase over the prior year. These upward revisions in guidance demonstrate Ingersoll Rand's commitment to utilizing its cash resources strategically and capitalizing on growth opportunities.
Outperforming the Broader Market
In the past five years, Ingersoll Rand has demonstrated superior performance compared to the S&P 500 when dividends are taken into account. This outperformance serves as a testament to Ingersoll Rand's capacity to optimize its performance by leveraging its diverse portfolio, enabling it to thrive in various market conditions.
Ingersoll Rand Compared to the S&P 500 5Y (Created by author using Bar Charts)
Portfolio Optimization Fostering Growth
With the goal of ensuring long-term profitability and growth, Ingersoll Rand Inc. actively manages its portfolio of companies and goods. The organization assesses the performance and potential of each business unit before making strategic decisions to sell non-core or underperforming assets and invest in high-growth industries.
The sale of Club Car in 2021 as part of Ingersoll Rand's Industrial segment's divestiture is an illustration of the company's Portfolio Optimization plan. Ingersoll Rand simplified its portfolio and concentrated on business in climate and manufacturing solutions by selling this non-core company.
Ingersoll Rand's portfolio changed after the divestment to become more concentrated on its core competencies, particularly in offering cutting-edge and environmentally friendly climatic solutions via its Trane and Thermo King brands. The company was able to more efficiently direct resources and investments toward its rapidly expanding and higher-margin areas thanks to this strategic shift.
Ingersoll Rand can focus on areas wherein it has an edge: enhancing operational efficiency, and providing value to its clients thanks to the sale of non-core businesses. The company is able to improve its financial performance, solidify its position in the market, and generate value for its shareholders with the aid of this portfolio optimization technique.
Analyst Consensus
In the past three months, a consensus of 17 analysts has rated Ingersoll Rand as a "buy," highlighting their recognition of the company's potential for growth and its strategic optimization capabilities. Furthermore, the average 1-year price estimate of $67 indicates a potential upside of 13.77%, suggesting that analysts anticipate positive performance from Ingersoll Rand in the coming year.
Valuation
Prior to formulating my assumptions and performing a discounted cash flow analysis, I will assess Ingersoll Rand's Cost of Equity and Weighted Average Cost of Capital using the Capital Asset Pricing Model. By considering a risk-free rate of 3.81%, which is based on the yield of a 10-year treasury, I have determined that the Cost of Equity for Ingersoll Rand stands at 8.06%, as indicated below.
Created by author using Alpha Spread
Taking into account the aforementioned Cost of Equity, I have computed the Weighted Average Cost of Capital to be 7.55%, as indicated below. This figure is lower than the industry average of 9.94%.
Created by author using Alpha Spread
Through the implementation of a Firm Model DCF analysis using FCFF, I have determined that Ingersoll Rand is currently undervalued by approximately 7%, with a fair value estimate of around $63.04. This assessment takes into account a discount rate of 7.56% over a 5-year time frame. Moreover, I projected a mid-single-digit revenue growth rate beyond 2023, anticipating a slight deceleration in growth as the company expands and encounters greater growth challenges. Furthermore, I anticipate that Ingersoll Rand will persist in optimizing its portfolio's performance, leading to expanded profit margins in the coming years.
5Y Firm Model DCF Using FCFF (Created by author using Alpha Spread)
Risks
Supply Chain Disruptions: Any supply-chain problems, such as a lack of components or raw materials, or problems with transportation, could influence Ingersoll Rand's manufacturing capacity and cause delays or higher prices.
Economic Conditions: Performance at Ingersoll Rand is affected by world economic circumstances. Reduced demand for its goods and services could result from a slowdown in the economy or a large recession. This may be evident through current high rates along with projected reduced demand later into 2023.
Conclusion
In summary, I recommend a "buy" rating for Ingersoll Rand based on its strong long-term growth potential, track record of outperforming the market, strategic portfolio optimization to drive margin expansion and growth, and the undervaluation indicated by my DCF analysis.
For further details see:
Ingersoll Rand: Portfolio Optimization Fostering Compounding Growth