A Quiet Industrial Giant

01/22/2008 12:00 am EST

Focus: STOCKS

Jon Markman

Editor, Trader's Advantage

Jon Markman, editor of Jon Markman’s Strategic Advantage, finds a diversified industrial company that’s surprisingly well insulated from economic downturns.

Given its history (dating to 1871) as a mining and heavy construction equipment provider, diversified industrial giant Ingersoll Rand (NYSE: IR) has long been categorized as a classic, capital-intensive cyclical play. As the impending recession approaches, Ingersoll Rand has seen its shares manhandled by investors going defensive with their portfolios.

Yet Ingersoll Rand isn't the same company that it once was. The company has evolved from providing equipment to miners and construction workers to focusing on technologies in the climate control, industrial, and security sectors. And after a string of recent strategic moves, the company is well on its way to insulating itself from the vagaries of the business cycle:

  • Its drilling business was sold off to a Swedish company, Atlas Copco, back in 2004.
  • Early 2007 saw the sale of IR's road construction and heavy equipment division to truck maker Volvo for $1.3 billion.
  • Back in July, the South Korean company Doosan purchased the company's iconic Bobcat construction-machinery subsidiary for nearly $5 billion.
  • And finally, just last month, Ingersoll Rand announced its intention to purchase heat, ventilation and air conditioner (HVAC) provider Trane (NYSE: TT) for roughly $10 billion.

The last item, if approved by shareholders, will be a brilliant bolt-on acquisition for Ingersoll Rand, given its existing business in commercial climate-control technology. In fact, this segment is IR's largest (it is responsible for 40% of its revenues and 35% of its earnings), and it can handle the complete food-delivery life cycle [from seagoing containers to warehouse storage to air conditioning and refrigeration in the store].

Another way that the Trane acquisition makes great sense for IR is the ballooning need for HVAC equipment in the developing world. As places like China, India, and the Eastern European countries become more prosperous, the company will now be able to expand overseas. Over the next five years, IR wants to bring the mix between domestic and international sales to 50-50.

IR is also involved in security and access control systems, as well as air compressors and blowers used in industrial applications, [as well as] some pretty high-tech biometric hand and finger scanners. These scanners can even be equipped with an integrated heater option, ensuring "comfortable and trouble-free use even in the coldest environment"—like, say, a Krack-cooled warehouse.

Since the company has nearly $11 billion in annual sales and a number of interesting businesses, we will surely revisit the Ingersoll Rand story. For now, know that the company is shooting for double-digit revenue growth and 12% to 15% earnings growth through its bolt-on acquisition strategy. The financial picture looks excellent as well, with healthy cash flow and $1.4 billion allocated to share repurchases this year. I'm looking for earnings per share of $3.85 this year, moving to $4.45 in 2009. With a reasonable 14x multiple, my six-month target is $51—which would be more than a 25% move from [Friday’s close above $37].

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