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Here is a look at how Ingersoll-Rand plc (NYSE:IR) fares in ModernGraham's opinion, based on an updated and modernized version of Benjamin Graham's requirements of defensive and enterprising investors from The Intelligent Investor:

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor - must pass at least 6 of the following 7 tests: Score = 2/7

  1. Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
  2. Sufficiently Strong Financial Condition - current ratio greater than 2 - FAIL
  3. Earnings Stability - positive earnings per share for at least 10 straight years - FAIL
  4. Dividend Record - has paid a dividend for at least 10 straight years - PASS
  5. Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - FAIL
  6. Moderate PEmg ratio - PEmg is less than 20 - FAIL
  7. Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - FAIL

Enterprising Investor - must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5

  1. Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - FAIL
  2. Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - FAIL
  3. Earnings Stability - positive earnings per share for at least 5 years - PASS
  4. Dividend Record - currently pays a dividend - PASS
  5. Earnings growth - EPSmg greater than 5 years ago - PASS

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Value$89.60
MG OpinionUndervalued
Value Based on 3% Growth$33.75
Value Based on 0% Growth$19.78
Market Implied Growth Rate9.26%
NCAV-$21.79
PEmg27.02
Current Ratio1.46
PB Ratio2.55

Balance Sheet - 9/30/2013

Current Assets$5,629,700,000
Current Liabilities$3,848,600,000
Total Debt$3,151,100,000
Total Assets$19,002,000,000
Intangible Assets$10,160,900,000
Total Liabilities$11,907,300,000
Outstanding Shares288,090,000

Earnings Per Share

2013 (estimate)$2.46
2012$3.30
2011$1.18
2010$2.23
2009$1.41
2008-$8.54
2007$2.48
2006$3.31
2005$3.09
2004$2.37
2003$1.72

Earnings Per Share - ModernGraham

2013 (estimate)$2.33
2012$1.48
2011$0.30
2010-$0.04
2009-$0.66
2008-$0.95

Conclusion:

Ingersoll-Rand appears to be undervalued, but just barely misses the mark for the Enterprising Investor by having a little too much debt relative to its current assets. The company does not qualify for the Defensive Investor because of its lack of earnings stability or growth over the ten year period, its low current ratio, and its high PEmg and PB ratios. Enterprising Investors should keep a very close eye on Ingersoll-Rand to see if the debt level improves.

Meanwhile, value investors seeking to follow Benjamin Graham's methods should review other opportunities by looking at companies that pass the ModernGraham requirements. With regard to the valuation, the company has grown its EPSmg (normalized earnings) from -$0.95 in 2008 to an estimated $2.33. This demonstrates a level of growth that is superior to the market's implied estimate for growth of 9.26%. As a result, the company appears to be undervalued presently.

What do you think? Do you agree that Ingersoll-Rand is undervalued? Is the company not suitable for Defensive Investors or Enterprising Investors? Is there a company you like better?

Disclosure: The author did not hold a position in Ingersoll-Rand (IR) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.

Source: ModernGraham Valuation Of Ingersoll-Rand plc