Morningstar | Ingersoll-Rand's Pending Acquisition of PFS Makes Strategic Sense and Should Support Better 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 bright spot in recent years; since 2010, organic sales have grown at about a 5% average annual rate and adjusted operating margins have expanded by over 600 basis points. 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, which we estimate is the second-leading player in compression systems (14% of consolidated sales) and also manufactures power tools, ARO fluid management equipment, and Club Car utility vehicles, has underperformed in recent years due to challenging end markets. However, we are encouraged by early signs of optimism in industrial end markets, and we expect the segment will once again be accretive to consolidated sales and margins as end-market demand normalizes.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 97% average free cash flow conversion ratio over the past 25 years. We think Ingersoll-Rand’s capital allocation strategy has generally been well balanced over the last couple of years, and the company utilized proceeds from divestitures to fuel outsize share-buyback programs. 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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