Morningstar | Ingersoll Rand's Focus on Sustainability Should Support Long-Term Growth
Ingersoll Rand is a leading supplier of climate control and industrial products and services, and the firm boasts a portfolio of reputable brands. The company’s climate segment is a dominant player in HVAC systems (63% of consolidated sales) with its Trane and American Standard brands and in transportation refrigeration (15% of sales) with its Thermo King brand. The climate segment has been a strong performer in recent years; over the past five years, organic sales growth has averaged over 6%, and adjusted operating margins have expanded by over 800 basis points since the 2009 trough. We have a positive outlook for this segment’s growth prospects driven by global trends in urbanization, food spoilage reduction, and sustainability. We also see room for growth in U.S. commercial, institutional, and residential construction. The company’s industrial segment (22% of consolidated sales), which we estimate is the second-leading player in compression systems and also manufactures power tools, ARO fluid management equipment, and Club Car utility vehicles, underperformed amid the pullback in industrial production during 2015-16, but the segment's fundamentals greatly improved in 2017 and 2018. We expect the recently announced acquisition of Precision Flow Systems will further bolster the industrial segment's operating performance after the deal closes, likely in mid-2019.Ingersoll Rand’s large installed product base generates a stable stream of higher-margin aftermarket and service revenue, and we think the company has opportunities to expand its service revenue mix, which should promote improved profitability, help dampen the firm’s cyclicality, and support free cash flow consistency. Ingersoll Rand has been a notable free cash flow producer, with a 15-year average free cash flow conversion ratio over 100%. We think Ingersoll Rand’s capital allocation strategy has been well balanced over the last couple of years. Going forward, we expect the firm to be a bit more acquisitive to supplement its future growth prospects.Ingersoll-Rand provides products, services and solutions to enhance air in homes and buildings, transport and protect food. Co.'s segments are: Climate. which includes Trane® and American Standard® Heating & Air Conditioning, providing heating, ventilation and air conditioning systems, and commercial and residential building services, parts, support and controls, energy services and building automation as well as transport temperature control solutions; and Industrial, which includes compressed air and gas systems and services, power tools, material handling systems, ARO® fluid management equipment, as well as Club Car ® golf, utility and rough terrain vehicles.
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