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Ingersoll Rand Checking All Of The Street's Preferred Thematic Boxes

Mar. 04, 2021 11:32 AM ETIngersoll Rand Inc. (IR)ATLKY4 Comments
Stephen Simpson profile picture
Stephen Simpson


  • Ingersoll Rand has been on a tear in an already-hot industrial sector, with many thematic elements working in the stock's favor.
  • Guidance for 2021 may be conservative, and IR is well-positioned for a short-cycle industrial recovery, as well as further cost synergy upside.
  • M&A should be a source of value; management made a good deal for the HPS business and will likely pursue additional low-risk tuck-in deals.
  • Valuation remains the obstacle. I love a good story, and IR checks a lot of thematic boxes, but I can't make the numbers work relative to valuation.

Investors love a good story, and Ingersoll Rand (NYSE:IR) is certainly obliging them, as this company checks almost all of the Street's preferred thematic boxes right now. Ingersoll Rand is strongly leveraged to the short-cycle industrial recovery, passed through the downturn with excellent decremental margins, offers outsized synergy opportunities, has M&A optionality, and offers a market share growth/leverage story, as pre-break up Ingersoll Rand didn't invest as much into its industrial businesses. Frankly, all that the story lacks is leverage to industrial software, HVAC/green retrofit, or life sciences/bioproduction, and even on the latter point, there is leverage to medical/scientific fluidics.

I thought Ingersoll Rand already had a pretty healthy valuation in August, but I grossly underestimated how much more the Street would pay for the company's leverage to the post-pandemic recovery and that thematic excellence. With that, the shares are up about 40% since my last article, roughly doubling the return of the larger industrial group and handily outperforming Atlas Copco (OTCPK:ATLKY) as well.

I still have issues with valuation, as mid-to-high single-digit revenue and FCF growth and over two points of operating margin improvement from 2021 to 2023 can't really get me to a good place on valuation. I don't discount the upside potential from more M&A moves, nor the opportunities to gain share or the value of a good story, but the drivers for further outperformance seem more limited to me.

A Healthy Beat, With Likely Conservative Guidance

Ingersoll Rand did itself no harm with a good fourth quarter report.

Revenue fell more than 7% in organic terms (to $1.51B), worse than the industrial group average of a roughly 4% organic contraction, and the exclusion of the High Pressure Solutions business wouldn't alter that much. Still, that was good for a 3% beat relative to expectations.

Gross margin

This article was written by

Stephen Simpson profile picture
Stephen Simpson is a freelance financial writer and investor. Spent close to 15 years on the Street (sell-side, buy-side, equities, bonds); now a semi-retired raccoon rancher. That last part isn't entirely true. Probably.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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