Ingersoll-Rand Makes a Compelling Case

 | Dec 10, 2012 | 1:00 PM EST  | Comments
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Ingersoll-Rand (IR) shareholders got some good news over the weekend. According to dispatches by Bloomberg and Reuters, the company will sell assets worth about $1.5 billion, raise its dividend and buy back some of its own shares. 

Ingersoll-Rand has its headquarters in Swords, Ireland, but gets about two-thirds of its revenue in the U.S. Its biggest subsidiary is Trane, which makes air conditioning, heating and ventilation systems.

Nelson Peltz, the corporate raider and agitator, has been pressing Ingersoll-Rand to take steps to bump up the stock and make the business more cohesive. People such as Peltz aren't necessarily popular in corporate America, but they do a lot of good.

What Ingersoll-Rand will sell wasn't clear yet Sunday night, when I wrote this comment. Most likely, it will be the commercial and residential security units, as reported by Reuters.

Ingersoll-Rand's sales this year will be about $14 billion. The market value of its stock is just above that, about $14.6 billion.

While the Peltz-inspired shakeup is probably good for shareholders, I can think of three other reasons to buy Ingersoll-Rand shares.

First, the Trane unit should have a good year in 2013, as multi-unit and residential construction improves.

Second, the company's geographical mix is well suited to current conditions. It gets less than 6% of its revenue from Europe, where recessions prevails, and about 66% from the U.S., which I believe is in good shape unless Congress completely bungles the fiscal-cliff negotiations.

Third, profitability has been improving. Ingersoll-Rand posted a 13.6% return on stockholders' equity in the latest quarter – the fourth consecutive quarter in which that figure increased. Pretax margins have improved for three quarters in a row and hit almost 11% last quarter, the best showing since June 2008.

The stock's valuations -- about 1.1x sales and 14x earnings -- are normal compared with the stock's own history. But I expect earnings to improve. The security divisions, which are most likely being hived off, had the worst growth of any of the company's major operations in the past few years. So the sales now in progress could help ensure that profitability continues to improve.

Top managers are incentivized to do the right thing for shareholders. CEO Mike Lamach owns almost $9 million worth of stock. Chief financial officer Steven Shawley owns close to $7 million.

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