The past few years, Ingersoll-Rand Company Limited (NYSE: IR) has been enjoying the benefits of a booming housing market. Its construction, security, industrial technologies, and compact vehicles divisions all tend to make money when house construction is booming, and the stock price has risen over the past couple years. These are mostly cyclical businesses, so there have been plenty of ups and downs, but the general trajectory has been up.
But the past few months haven't been as good, and the stock has lost almost 25% of its value. The third-quarter results were also down from the second quarter, and net income was down from the previous three quarters. IR was particularly hard hit by the decline in sales of its Bobcat loaders. This was almost certainly due to the slowing housing market, although there is usually more of a lag time before the impact of a housing slump is felt so strongly by a company like Bobcat.
It's going to be interesting to see how IR weathers the economy over the next couple of years. The company has been diversifying to avoid being hit by this kind of slowdown, and so it may come out okay. But there's another reason to be careful here, which is the tax issue. With the Democrats now in power we may see some regulation that prevents American corporations from moving to Bermuda to avoid corporate taxes. If this does occur, it could put a serious dent in IR's net income. There is also some asbestos litigation looming, as well as some legacy retiree costs left over from a division (Dresser-Rand) the company sold.
On the whole, I think this is a well-run company that is doing the right things to avoid being hit too hard by the housing slowdown. But I'd approach with caution.
Type of stock: A construction and mostly heavy industries company in a cyclical business that may be hit hard by the housing slump.
Price target: At $38, this stock is close to its 52-week low and it just reported a weak third quarter. I'd wait and see how the fourth quarter goes, or wait for a serious dip into the low $30s before feeling comfortable with this one.
IR 1-yr chart: