Ingersoll (IR) Q4 Earnings in Sync, Offers Bullish 2018 View

Industrial goods manufacturer Ingersoll-Rand Plc IR reported relatively healthy fourth-quarter 2017 results with adjusted earnings from continuing operations of $1.02 per share compared with 84 cents in the year-earlier quarter. The healthy year-over-year improvement in adjusted earnings was largely driven by top-line growth. Adjusted earnings were in sync with the Zacks Consensus Estimate.

GAAP earnings for the quarter were $459.9 million or $1.81 per share compared with $198.8 million or 75 cents per share in the year-ago period. The year-over-year increase in GAAP earnings was primarily attributable to non-cash tax-related benefits of $241.2 million (95 cents per share) related to U.S. tax legislation. For full year 2017, the company recorded GAAP earnings of $1,302.6 million or $5.05 per share compared with $1,476.2 million or $5.65 per share in 2016.

Quarterly revenues were $3,618.1 million, up from $3,358.8 million in the year-ago quarter. Revenues exceeded the Zacks Consensus Estimate of $3,516 million. Organic revenues improved 6% year over year. Organic revenues from North America were up 7% while that from International markets were up 4%. For full year 2017, revenues increased to $14,197.6 million from $13,508.9 million in 2016 on diligent execution of operational plans.

Segmental Performance

The Climate segment recorded sales of $2,760 million compared with $2,559 million in the year-ago quarter. The upside was driven by solid revenues from commercial and residential HVAC (heating, ventilation and air conditioning) businesses, particularly in underserved markets in China.

The Industrial segment reported revenues of $858 million in the quarter, up from $800 million in the prior-year quarter.

Margins

Operating margin was 10.7% compared with 10.5% in the year-ago quarter owing to higher volume and productivity improvements, partially offset by material and other inflation. Adjusted operating margin improved to 11.1% from 10.9% in the prior-year quarter. Adjusted operating margin for the Climate segment was 12.9% compared with 13.7% in the year-ago quarter owing to higher material price inflation. Adjusted operating margin for the Industrial segment was 13.2%, up from 11.6% in the year-ago quarter driven by higher mix of services, new product development and cost reductions.

Balance Sheet and Cash Flow

As of Dec 31, 2017, cash and cash equivalents were $1,549 million while long-term debt was $4,064 million compared with respective tallies of $1,715 million and $4,070 million. Net cash from operating activities for 2017 was $1,524 million compared with $1,522 million in the prior-year period. Ingersoll spent $1 billion on share buybacks in 2017, $106 million of which was spent in the fourth quarter. Free cash flow for full year 2017 was $1,340 million, which equated to 118% of adjusted net income. Return on invested capital was 21.2% for the year.

Bullish Outlook

Ingersoll offered a bullish guidance for 2018. It expects adjusted earnings from continuing operations to be within $5.00 and $5.20 per share, while revenues are expected to rise 5-5.5%. Cash flow from operating activities is expected to be in the range of $1.45 billion to $1.55 billion, with free cash flow between $1.2 billion to $1.3 billion.

Stocks to Consider

Ingersoll currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the sector include Altra Industrial Motion Corp. AIMC, DXP Enterprises, Inc. DXPE and EnPro Industries, Inc. NPO, each carrying a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Altra Industrial has a positive earnings surprise history with an average of 17.3% in the trailing four quarters, comprehensively beating estimates in each.

DXP Enterprises has a positive earnings surprise history with an average of 148% in the trailing four quarters, beating estimates twice.

EnPro has long-term earnings growth expectations of 15.5%.

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