EUR 850.00 For Business Accounts Only

Morningstar | Ingersoll Rand’s Strong First-Quarter Results Take the Back Seat to Break-Up Announcement. See Updated Analyst Note from 30 Apr 2019

Narrow-moat rated Ingersoll Rand announced both its first-quarter results and the pending combination of its industrial segment with publicly traded Gardner Denver. The latter announcement confirms an earlier report by The Wall Street Journal, which we discussed in our April 29 analyst note.

Ingersoll Rand’s industrial segment ($3.3 billion sales and $534 million adjusted EBITDA in 2018) will be spun-off tax-free to shareholders and will then immediately merge with Gardner Denver. This newly formed entity (IndustrialCo) will likely take on the Ingersoll Rand name and ticker and will be led by Gardner Denver CEO Vicente Reynal. Existing Ingersoll Rand shareholders will receive newly issued shares of IndustrialCo worth $5.8 billion and Ingersoll Rand’s remaining entity (ClimateCo) will receive $1.9 billion cash. The $7.7 billion total consideration values the industrial segment at 11 times 2019 adjusted EBITDA (before synergies). Ingersoll Rand shareholders will own 50.1% of IndustrialCo. Ingersoll Rand’s remaining climate business (ClimateCo), which will be led by current Ingersoll Rand CEO Mike Lamach, will be renamed and trade under a new ticker.

Overall, Ingersoll Rand’s first quarter was a good one, and by our count, marked the firm’s fifth consecutive sales and EPS beat relative to consensus expectations. Management raised its 2019 EPS guidance from $6.25 (midpoint) to $6.35.

As we discussed in our April 29 analyst note, we can certainly understand why Ingersoll Rand’s management decided to split the firm, and we think the $7.7 billion consideration is fair. In fact, our DCF-based valuation of the stand-alone industrial segment yields an enterprise value of approximately $6 billion. As such, we increased our fair value estimate by about 8% to $111 per share to reflect what we see as a deal premium. However, we’ll likely adjust our valuation as we incorporate a more detailed analysis of the 2020 spin-off and merger into our valuation model.

In our April 29 analyst note, we valued the deal at a 12 times forward EV/EBITDA multiple, but we had assumed total consideration of $8 billion (versus $7.7 billion announced) and industrial segment EBITDA of approximately $650 million versus Ingersoll Rand’s expectations of $700 million.

Turning back to Ingersoll Rand’s first-quarter earnings results, consolidated sales grew 6% (8% organic) to $3.6 billion, which was 2% higher than the consensus estimate. Adjusted operating margin expanded 90 basis points to 9.4%, which contributed to a 27% year over year increase in adjusted EPS to $0.89 versus $0.80 consensus. Ingersoll Rand’s climate segment performed better on a year-over-year basis than its industrial segment. Climate revenue grew 7% (10% organic) to $2.8 billion and expanded adjusted operating margin 130 basis points to 11.4%, whereas the industrial segment reported approximately flat revenue at $772 million (up 3% organic) and flat adjusted operating margin at 12.3%. A supplier disruption, which management expects will be resolved during the second quarter, was a 50-basis-point drag on industrial adjusted operating margin.

While both the climate and industrial segment reported positive first-quarter book-to-bill ratios of 1.04 and 1.07, respectively, compared with the prior-year period, climate bookings fell 5% and industrial bookings declined 2%. However, both segments faced tough prior-year comparisons (climate bookings were up 15% and industrial bookings were up 11% last year). CEO Mike Lamach explained that the 5% decline in climate bookings was driven by the transport business, which built a record backlog in 2018 and therefore has a healthy revenue outlook through 2020.