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Industrials Stocks Exit the MP with 37% and 54% Returns

Following their respective earnings releases, two industrials Spinoffs will exit the Model Portfolio after providing strong returns (though for both we do see further upside for longer-term investors). In its first earnings since the unique European Spin-Merger, Metso Outotec Corp. (MOCORP FH) has given a +37% return in less than two months, while Ingersoll Rand, Inc. (IR) beats estimates with signs of a recovery, and as returned an adjusted +54% since its entry in early March 2020.

Earnings Update...
MOCORP FH: With the COVID-19 induced lockdowns and widespread restrictions in travel and workforce mobility, this had a negative impact to Metso Outotec’s (MOCORP FH) first earnings results (Q2FY20) since its Spinoff. However, the stable demand in consumables and spare parts helped offset the hit to new equipment demand due to the restrictions.

The resilient performance from Metso’s Minerals and Outotec’s Minerals Processing assisted in posting comparatively better earnings than last year, which offset the subdued performance by the Outotec Minerals Refining business. MOCORP saw a healthy project margin in its Minerals business and its solid execution resulted in a +2% Y-o-Y growth in sales to €751m, and improvement in EBITA margin by 340 basis points Y-o-Y to hit an EBITA margin of 16.2%.

One of the main benefits to investing in this newly merged entity was Outotec’s strong order backlog, which assured a +9% Y-o-Y growth in Outotec Minerals Processing sales to €214m and leading to an improved EBIT margin of 12.3% compared to the 10.8% reported in the same period last year. The successful integration process from the merger has led to the management increasing its cost synergy target to €120m from the initially guided €100m.

IR: Ingersoll Rand, Inc. (IR) announced its second standalone quarterly results following its transformative Reverse Morris Trust transaction with its Q2FY20 earnings on August 5, 2020. It reported revenues of $1,264m (higher than the consensus estimate of $1,168m and The Edge’s projection of $1,176m). Adjusted EBITDA was around $241m, way ahead of the consensus estimate of $176m and The Edge’s projection of $204m. It also beat the consensus EPS by $0.11, reporting EPS of $0.31 per share (higher than the consensus estimate of $0.20).

After the integration through the RMT transaction was effected, the management has successfully delivered on noted synergies, the structural and procurement synergies assisting in $100m of annualized structural cost reductions to date (with ~$80m of savings expected to be delivered in 2020). Notably, the management now expects to deliver ~35% to 40% of IR’s overall synergy target in 2020, which is around $95m in savings. The management has assured it will successfully deliver on the cost synergies target of $250m by year 3, driven by procurement, supply chain, and manufacturing efficiencies as well as SG&A savings.

The performance of the Industrial Technologies and Service segment followed expectations with total business orders down 15% to 20%. The Precision Science Technology segment saw flat performance, while the Specialty Vehicles segment continued to see strong momentum assisted by positive order rates driven by a rise in consumer vehicle demand. Lastly, the limited-to-no market activity from the pandemic saw activities in the High Pressure Solutions segment down over 90%.

The Edge View (MOCORP FH)...
We continue to remain positive on the stock due to its healthy order backlog and its presence across the whole minerals processing value chain assisting it to provide end-to-end solutions across the whole process, which we believe would contribute towards MOCORP maintaining its market position. Furthermore, profitable aftermarket and spare part products assures margin resiliency, which continues to support our investment case.

The Edge View (IR)...
We believe the COVID-19 pandemic will have a modest influence on IR’s long-term economic prospects. Owing to its greater end market diversification and near-prime position in the industrial pumps/compressors market, this lends confidence to its market position and future performance capabilities once activities return to normalcy. Nearly 34% of revenues from aftermarket sales ensures an increased level of profitability for the company. Additionally, we expect the business to benefit from its diversified portfolio of complementary products, larger scale, and cost synergies from the merger. Ample liquidity on its balance sheet and attractive portfolio optionality also provides IR with both acquisition opportunities in its core businesses and a potential opportunity to divest its noncore businesses if the need or a lucrative prospect arises.