Ingersoll-Rand: An Industrial Bargain
09/04/2017 2:54 am EST
I look for a rotation out of the growth-oriented fare that’s led the market for much of 2017 and into cyclical and value groups including the financials, energy and industrial stocks, explains growth stock expert Elliott Gue, editor of Capitalist Times.
To take advantage of this rotation, we’re adding industrial giant Ingersoll-Rand (IR) to our Wealth Builders Portfolio; the firm's largest division is Climate, which includes market-leading heating, ventilation and air conditioning (HVAC) brands Trane and American Standard.
At Ingersoll’s analyst day presentations earlier this year, management outlined a plan for the Climate business to grow from a $10.9 billion business this year into roughly a $12.4 billion business in 2020.
Around one-third of this growth is expected to come from overall global economic expansion, driving demand for HVAC units installed in offices, commercial buildings and residences.
However, two-thirds of that growth is expected to come from company-specific initiatives. One example of a growth driver is the company’s Auxiliary Power Unit (APU) aimed at the trucking market.
APUs are small electric or diesel-powered units that supply power to the sleeper cabs of large (think 18-wheeler) trucks. That power is used to run the HVAC system and other accessories such as lights and cooking equipment.
Currently, two-thirds of all sleeper cabs in the US do not have APUs. Instead, truckers simply idle their engines to provide power when needed to run basic sleeper cab accessories and recharge batteries.
Of course, that’s inefficient and wastes fuel, which is the key cost in the trucking market. Ingersoll’s Thermo King unit is a market leader, and management sees growth of 17 percent annualized through 2020.
Ingersoll-Rand pulled back following its second quarter earnings release at the end of July despite beating both top and bottom line consensus expectations and guiding revenue estimates higher for the full year. Some analysts cited a decline in commercial HVAC orders year-over-year as a driver of the pullback.
However, this weakness was likely due to a large order in the second quarter of last year, which made the year-over-year comparison tougher.
We believe management is being conservative in its guidance for organic growth this year and will be able to exceed estimates in the second half.
Meanwhile, the dip offers investors a bargain opportunity to buy a market leader with a 2.1 percent dividend yield and a history of buying back stock to return capital to shareholders. Ingersoll Rand is added to the Wealth Builders Portfolio as a buy under $90.