Special Request Stock Lookup: Ingersoll-Rand (IR)

Grant over at The Corner Office Blog asked me to look into a stock last week, namely Ingersoll-Rand (IR). This stock has had some recent interest by many investors due to the big purchase by the Big P.O.P.P.A. (Pimp Oracle of Potential Plays in omahA, aka Mr. Buffet). If you haven't read much about IR over the past two years, it has gotten rid of most of its industrial units including its most famous, Bobcat. What's left is a mishmash of industrial tool, refrigeration, and security units making up a roughly 9.5 billion dollar company. None of these businesses I find particularly exciting, although it should be said that their brands in each of their markets are either the leaders or top 2 companies in the industry. For example Schlage security and locks compete closely with Stanley security and locks. On paper, they look as if they have made each of their industries rather efficient and profitable.

The future for IR is the purchase of Trane, in my opinion, the foremost supplier of key HVAC components for business and commercial markets. IR claims that they would like to get into less cyclical market places and with their freed up capital, Trane looked like a good fit. Trane too has had its own set of splits over the last two years. Formerly American Standard, Trane was the result of a three way split of the former company. The new Trane is roughly a 9.5 billion dollar commercial and industrial HVAC company. Trane has an excellent company mix of products and services that is compromised of the markets highest efficiency residential HVAC units, commercial HVAC units, commercial chiller systems, and excellent technical services. This focus on high efficiency equipment will keep the company firmly planted for current and future commerce due to many companies needs for costs savings and government tax credits on energy saving projects. Trane is also known in the contract engineering world as the “go to” company for assistance in spec'ing components on new projects due to their own extensive technical support group. That status obviously pushes contracts towards utilizing Trane equipment. I should know I purchased a new chiller last year and found that the engineering companies in the Midwest area all work with Trane engineers first before drawing out the specifications for a project. Trane has seen some softness in it's residential market (roughly ~24% of the business) and plans on seeing more ahead, but in its most recent annual report believes that it's commercial unit has and will more than cover that loss for now. One other fact though, is much like the rest of IR's porfolio, is that Trane is a very competitive company in a very competitive market, competing with other good players Carrier, York, McQuay, and Danfoss.*

Much like my report on Baldor. Trane has products for the commercial market that will consistently need replacement. Industrial HVAC and chiller systems are always being replaced due to new more higher efficient machines or for old equipment failure. Their service department does most of the installations as well, so somewhere in the range of 65-75% of its revenue is tied up with the commercial contract dealings. From my contacts in the industry, this is a stable, profitable place to be.*

Upon further examinations I found the Trane annual report informative and helpful in formulating a position on the companies current financial status. However, IR's report was not very revealing of the companies current financial status. So I next searched the basics. IR has a absurdly low P/E of 3.2 and Trane's rather high P/E of 52.6, neither of which I don't really think is reliable. IR is particularly good at their profit margin at 44% compared to Trane's 2.37% and Return on Assets roughly the same at IR (5.33%) and Trane (7.19%). Although I am unsure how clear this data is affected by IR's sale of Bobcat and Trane's split from Amercian Standard. So I am uncomfortable with this analysis.**

Research of products from both companies fruited some good products including Trane's CenTraVac Chillers, Trane's CleanEffects air cleaning system, Trane's residential XV Furnaces, and IR's lightweight pneumatic tools. The Trane CenTraVac Chillers could be big money makers.

I do feel that when IR finalizes its purchase of Trane, it should provide some stabilization to each of the companies due to the amount of splitting, selling, and purchasing that each has experienced over the last two years. But again, my opinion though is that IR brings less to the table than Trane. Trane's infrastructure is mature and set in its ways, but like any large business purchase or merger, IR will want to put their imprint on the business. If they are not to careful, IR could really screw up a great company, but the great company looks as if it needs to cut costs (especially if the ROA is accurate for Trane). After seeing mergers from the inside out, it will take roughly six months to a year for the two companies to properly integrate into one another and see potential synergy savings. After that both companies might be able to flourish.

Official opinion: Wait on IR for now. I think the stock will dip back below $42.50 or lower and then start looking to buy. If it were my money though, I would wait four months from today and reevaluate. There is just too much unknown and too much competition to make me feel good about this right now.

Grant its your turn, my stock Petrobras (PZE).

Also, if anyone else wants me to look at a stock for them and give an opinion, I'm up to it. My expertise are industrials, green energy, and raven-haired ladies. The only expectation is that you do the same for me.

*Stats from Trane's 2007 Annual Report and IR' s 2007 Annual Reports

**Stats from Yahoo's Finance coverage for IR and TT