By Matt Doiron
According to a Form 4 filed with the SEC, Gary Forsee, a member of Ingersoll-Rand's (IR) Board of Directors, directly purchased 2,000 shares of the industrial products and climate control systems provider's stock on July 22nd at an average price of $61.67 per share. Because insiders already have a close economic connection to a company, it is often irrational for them to buy additional shares (increasing company-specific risk) rather than diversifying; this is one explanation for why studies generally show a small outperformance effect for stocks bought by insiders (read our analysis of studies on insider trading).
Taking a closer look at Ingersoll-Rand
Ingersoll-Rand has released its results for the second quarter of 2013. Revenue increased slightly versus a year earlier, reversing the decline in sales the company had experienced during Q1 and leaving the top line about flat for the first six months compared to the prior year period. With somewhat higher costs, Ingersoll-Rand recorded a small decrease in pretax income (with a higher effective tax rate causing earnings to be considerably lower). Cash flow from operations has been higher, however, and combined with issuances of debt the company repurchased nearly $500 million in stock in the first half of the year.
The stock currently trades at 19 times trailing earnings, a valuation at which investors should be looking for significant earnings growth even if the company is buying back shares. Wall Street analysts are expecting high EPS growth next year, and as a result the forward P/E is only 14. If the company does hit that target, and is showing profits growth, it would look more interesting from a value perspective but investors should probably hold off for now.
Insider Monkey tracks quarterly 13F filings from hundreds of hedge funds and other notable investors as part of our work researching investment strategies; we have found, for example, that the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year. Our database can also be used to investigate which top managers have recently reported large positions in individual stocks, and in this case we can see that billionaire Nelson Peltz's Trian Partners owned more than 13 million shares of Ingersoll-Rand as of the end of March (find Peltz's favorite stocks).
Comparing the company to its peers
Peers for Ingersoll-Rand include Johnson Controls (JCI), Eaton (ETN), General Electric (GE), and United Technologies (UTX). Johnson Controls and Eaton are similar to Ingersoll-Rand from an earnings multiples perspective; in fact, each of these two companies is valued at more than 20 times their trailing earnings numbers, both actually trade at a small discount to Ingersoll-Rand with forward P/Es of 13 in each case. Johnson Controls did grow its net income at a high rate in its most recent quarter compared to the same period in the previous fiscal year, but revenue growth was only 2% and so continued profits growth might not be sustainable. Eaton recorded double-digit growth rates on both top and bottom lines, and while of course it isn't guaranteed that this will continue, with a forward P/E of 13 it may be worth further research.
General Electric has been seeing fairly stagnant business, going by recent reports, and the stock features a trailing P/E of 18; at that price, it likely isn't worth considering on a pure value basis. GE does pay a dividend yield of 3.2% at current prices, and of course is quite the blue chip at a market capitalization of $250 billion, but even income investors should be somewhat concerned about its valuation. Thanks in part to acquisitions, United Technologies has reported improved financial results. With trailing and forward P/Es of 16 and 15, respectively, neither markets nor the sell-side are expecting much growth going forward and it may be worth following the company's results for a quarter or two to see how well its acquisitions are being integrated.
Ingersoll-Rand's current business conditions and fairly optimistic valuation would recommend against buying the stock for now, even with the recent insider purchase. Investors who are interested in similar companies may want to look into why Eaton has been doing so well and if this would be expected to continue for long enough for that company to his its EPS targets for next year and then continue growing beyond that point.