On Jan 3, 2017, Zacks Investment Research downgraded Ingersoll-Rand Plc IR to a Zacks Rank #4 (Sell) from a Zacks Rank 3 (Hold) earlier. Going by the Zacks model, companies holding a Zacks Rank #4 have high chances of underperforming the broader market in the quarters ahead.
Headquartered in Dublin, Ireland, Ingersoll-Rand designs, manufactures, sells and services a diverse portfolio of industrial and commercial products across the globe. From enhancing the quality and comfort of air in homes and buildings to transporting and protecting food and perishables, the product portfolio of the company secures homes and commercial properties and increases industrial productivity and efficiency.
Ingersoll continues to reposition its portfolio to focus on high-barrier markets. While such efforts are encouraging, they involve upfront costs which are likely to lead to earnings dilution in the near term. Consequently, the company is continually under stress to maintain profitability through stringent cost-cutting measures. Additionally, its international operations are subject to economic risks. Further, operations may be adversely affected by changes in economic conditions and local government regulations.
The company designs, manufactures and services products that incorporate advanced technologies, and entail various operating risks. The failure to develop new products and services that are readily accepted by the market could have an adverse impact on the company’s results in the long term. In addition, Ingersoll operates in a competitive market, due to which it has to continually invest in R&D initiatives to stay ahead of competition. This increases its operating costs.
Presently, with the economy in Europe being highly unpredictable post the Brexit referendum, it becomes difficult for the company to increase revenues and reduce costs. In addition, Ingersoll is likely to be stifled by the renegotiated deals and restrictions imposed on trade with other European Union members. Brexit could further result in higher tariff and non-tariff barriers to trade between the U.K. and the European Union, lowering productivity of the company.
However, the company outperformed the Zacks categorized Manufacturing – General Industrial industry with an average return of 12% compared with 6.4% for the latter, over the past 90 days. Over the same time period, the consensus estimate for the full year jumped from $4.09 to $4.20 per share today. With strong third-quarter 2016 results, Ingersoll raised its adjusted earnings from continuing operations guidance to $4.17–$4.22 per share from the earlier expectation of $4.00–$4.10. Adjusted free cash flow for the year is estimated to be approximately $1.3 billion, up from $1.0 billion to $1.1 billion projected earlier. Such bullish outlook portrays favorable growth dynamics and gives confidence to investors.
Ingersoll continues to focus on improving the efficiencies and capabilities of products and services within its core businesses. The company also has a solid foundation of global brands and leading market share in all major product lines. The geographic and industry diversity, coupled with a large installed product base provides ample growth opportunities within service, spare parts and replacement revenue streams. Additionally, the company’s complementary product portfolio and services is likely to assist it in strengthening the market position and achieving high productivity.
Stocks to Consider
Some better-ranked stocks in the sector include Advanced Disposal Services, Inc. ADSW, WageWorks, Inc. WAGE and Verisk Analytics, Inc. VRSK. Advanced Disposal Services and Verisk carry a Zacks Rank #2 (Buy), while WageWorks sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Advanced Disposal Services has beaten estimates considerably once over the trailing four quarters, for an average positive earnings surprise of 50%.
Verisk has a long-term earnings growth expectation of 11.6% and is currently trading at a forward P/E of 26.3x.
WageWorks has a long-term earnings growth expectation of 15.0% and is currently trading at a forward P/E of 80.6x.
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