For investors looking for an industrial stock that can outperform the S&P 500, has a history of beating estimates and is expanding margins, I suggest you look at Ingersoll-Rand (IR) . Year to date, shares of Ingersoll-Rand are up 42%. Can this stock stay hot?
Unlike General Electric (GE) , Ingersoll-Rand has a history of beating estimates and raising guidance on real organic growth and margin expansion. Unlike GE, IR has beaten the S&P 500 Index in the one-, two-, five- and 10-year periods. GE hasn't outperformed the S&P 500 in a decade (GE is part of Jim Cramer's Action Alerts PLUS charitable portfolio).
On Oct. 26, Ingersoll-Rand reported third-quarter earnings of $1.41 per share, $0.12 better than the consensus estimate. Revenue rose 2.3% to $3.57 billion. Organic revenue grew 3%. Bookings were up 2% to $3.45 billion. Organic revenue grew 4% in North America.
Ingersoll-Rand operates in two major segments: Industrial Technology (IT) and Climate Solutions (CS). Industrial Technology is 22% of total revenue, while Climate Solutions is 78% of revenue.
North American Climate Solutions has revenue of approximately $4 billion, of which half is aftermarket parts and half is equipment. Of the equipment sub-segment, $700 million is new construction and 65% to 70% is replacement equipment. The heating, ventilation and air conditioning (HVAC) market provides the company with steady growth. The replacement parts business does well regardless of the economy because customers are willing to spend money maintaining their HVAC equipment. In the third quarter, North American HVAC orders were up 9%.
The climate control segment reported sales of $2.8 billion, up 3%. Adjusted operating margins increased 90 basis points to 16.7%.
For fiscal 2016, management sees 2% organic revenue growth with a 12% adjusted operating margin.
The consensus is looking for 2018 revenues of $13.8 billion, which would be up 2.3%, and earnings of $4.51 per share. Historically, the industrial names trade between 16x and 19x forward estimates. Using the midpoint, it's easy to see that IR has room to move into the low-to-mid $80s, especially with some corporate tax relief from the incoming administration. Despite rising more than 40% this year, I think the stock can stay hot into 2017.