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Morningstar | Ingersoll Rand's 3Q Results: Another Quarter of Strong Growth and Profitability; Raised FVE to $99

Ingersoll Rand raised its full-year 2018 EPS guidance after reporting strong third-quarter results that beat Wall Street's estimates. The narrow-moat company's third-quarter revenue grew 10% year over year to $4.0 billion, slightly beating the consensus estimate. Adjusted operating margin expanded 100 basis points to 15.1% (versus the 15% consensus estimate), and adjusted EPS increased $0.31, or 22% year over year, to $1.75, which beat Wall Street's estimate by $0.04. Ingersoll Rand has been capitalizing on its strong positioning in healthy end markets, and the firm has so far proven its ability to manage profitability amid an inflationary environment. We've increased our fair value estimate about 2% to $99 per share, mainly due to the time value of money since our last update. We think this high-performing company is about fairly valued at current prices.

The climate segment (80% of total third-quarter sales) grew its top line 10% year over year, and its bookings grew 12%. The climate segment's adjusted operating margin expanded 50 basis points to 17%. The industrial segment reported 8% revenue growth (9% organic growth) and a 7% increase in organic bookings. The industrial segment's adjusted operating margin expanded 190 basis points to 14.6%.

We continue to be impressed with Ingersoll Rand's cost management in the face of rising input costs, including tariff-related headwinds. Indeed, the company achieved its goal of 25% incremental adjusted operating margins during the quarter. Realized price exceeded higher material costs by 10 basis points and productivity initiatives offset the increase in other costs. Strong operating leverage from the industrial segment also helped the firm achieve its goal.

It appears that all systems are go as Ingersoll Rand heads into 2019. Management pointed to its solid backlog and healthy end markets as reasons to be optimistic about the company's prospects in 2019. The firm will provide 2019 guidance next quarter.

Ingersoll Rand's board of directors authorized a $1.5 billion share repurchase program in October in addition to $0.4 billion remaining on prior authorizations. So far in 2018, Ingersoll Rand has spent over $500 million on share buybacks. CFO Sue Carter commented that the company will continue to repurchase shares when the stock is trading below management's estimate of intrinsic value.