Last week was more or less a week of good news on the industrial side of the North American economy. Companies like General Electric (NYSE: GE), Honeywell (NYSE: HON), Caterpillar (NYSE: CAT), and Dover (NYSE: DOV) all reported earnings that were generally strong and encouraging.
Among that group was Ingersoll Rand (NYSE: IR), whose earnings and guidance were likewise solid and above expectations. I do wonder, though, whether this is really good news in the grand scheme of things. After all, Ingersoll Rand has a reputation for being a later-cycle company. So, if Ingersoll Rand is starting to see stronger business, does that mean we have already seen the best of what has been a weak recovery?
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The Quarter That Was
Revenue rose 7% in the second quarter to about $3.7 billion - ahead of the average analyst guess, but not dramatically so. Growth was led by the industrial tech segment (up 16%) and its air compressors business, while climate solutions grew 6% and securities technologies actually shrank 1% on ongoing weakness in commercial construction.
The company managed to team this revenue growth with nearly 300 basis points of operating margin improvement. That fueled a nearly 50% increase in operating earnings and EPS of 76 cents - four cents better than the Wall Street hurdle.
Where To From Here?
As I said in the opening, Ingersoll Rand's optimism could perhaps be seen as cautious news for those who really follow industrial cycles. The thought here is that if IR is primarily a late-cycle play, stronger guidance from the company should suggest that the economy is in the later stages of recovery. If that happens to be true, then this has been a pretty anemic recovery, and worries about the stock market fire up all over again. (For related reading, see Intermarket Relationships: Following The Cycle.)
But not so fast.
I will grant that guidance from basic material companies like Nucor (NYSE: NUE) and Steel Dynamics (Nasdaq: STLD) was not great, and that supports worrying about the health of the recovery. Where the analysis might go wrong, though, is in the fact that Ingersoll Rand does a lot of business overseas, and it does a big business in replacement units and servicing installed equipment. What that means, then, is that Ingersoll Rand's business is not likely to be as predictive as it once was. After all, we all know that "conventional wisdom" can hang around for a very long time, even well after the time it is no longer accurate.
All in all, then, I do not believe that optimism from Ingersoll-Rand means the recovery is closer to the end. On top of that, strength in orders for refrigerated transportation equipment could be seen as a modest positive, as transport tends to be an earlier mover in the cycle.
The Bottom Line
Ingersoll Rand is not a stock on my watch list right now. Perhaps the company's (relatively) new CEO can make this a more dynamic company and improve what have historically been exceedingly mediocre results. Additionally, perhaps the commercial real estate market will recover faster and stronger than I expect, providing an as-of-yet unexpected boost to growth. Still, with so many other ideas to choose from, this is one that I am not going to buy without seeing some improvements in hand first. (For more, see The Value Investor's Handbook.)
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