3 Reasons To Own Ingersoll Rand

In December, Investopedia's Stephen Simpson questioned whether Ingersoll Rand (NYSE:IR), a chronic underperformer, has what it takes to match peers like United Technologies (NYSE:UTX) and Johnson Controls (NYSE:JCI). While it has some good brands and its stock is cheap, Simpson believes this doesn't justify making an investment in a stock that's consistently disappointed investors. Going out on a limb, I'm going to disregard his sage advice providing you with three reasons to own its stock; but if this goes south, you can't say you weren't warned.

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Warren Buffett originally invested in Ingersoll-Rand in the fourth quarter of 2006. At the time, Berkshire Hathaway (NYSE:BRK.B) had a much bigger investment in American Standard, the conglomerate that, among other things, owned Trane air conditioning and heating. After American Standard spun-off Wabco Holdings (NYSE:WBC), its air brakes division, and sold its kitchen business to Bain Capital, both in 2007, American Standard renamed itself Trane, as this was its only surviving business. Then, in June 2008, Ingersoll Rand completed its $10.8 billion acquisition of Trane, which brought Buffett's ownership in Ingersoll Rand to around 5.6 million shares.

Fast forward to today and Buffett's position consists solely of his original investment of 636,000 shares, bought in 2006. Holding for more than five years, there must be something he likes about the Irish conglomerate or he'd have sold long ago.

SEE: Mergers And Acquisitions: Understanding Takeovers

As Simpson points out, Ingersoll Rand's stock is cheap. So cheap that it's been buying back its stock on a fairly consistent basis as part of a $2 billion share repurchase program initiated in April 2011. From June 8, 2011, until the end of the year, it repurchased $1.2 billion of its stock at an average price of about $33.06 a share. The high for the year was $52.33, while the low was $26.13 with an average price of $39.23.

In my experience, I have seen very few companies buy back their shares at prices significantly below the average price in a given period. In fact, most end up paying far more than the average price. In 2011, Ingersoll Rand paid roughly 15.7% less than its average price for the year. Furthermore, its shares have gained almost 27% over the price paid for its shares, providing shareholders with an excellent return on investment (ROI). Its allocation of capital is outstanding.

Ingersoll Rand has four segments: climate solutions, residential solutions, industrial technologies and security technologies. Climate solutions, which provides HVAC (heating and refrigeration, ventilation and air conditioning) systems to homes and businesses, is by far its biggest unit, with a $8.3 billion in revenue and $824.6 million in operating income. This represents around 56% of overall revenue and 51% of overall operating income. It's definitely what drives the bus.

However, the division that gets less attention, but is a key part of its profitability, is industrial technologies. I only know about this segment because one of the brands is Club Car, the world's largest manufacturer of small-wheel, zero-emissions electric vehicles. They make golf carts.

Included in the industrial technologies segment are three other businesses that provide products and services that enhance energy efficiency. In 2011, it grew revenues by 14.8% to almost $2.9 billion and operating profits by 33.9% to nearly $416 million. In the span of two years it's improved the segment's operating margin by 640 basis points to 14.6%. At the company level, operating margins have improved 290 basis points over the past two years to 11.1%. It definitely makes a difference to the bottom line.

SEE: A Look At Corporate Profit Margins

Ingersoll-Rand's stock is down roughly 16% in the past year. So too are most of its peers. Its enterprise value is currently around 7.7 times EBITDA. With earnings per share in 2012 expected to be $2.90 to $3.21, it's in better shape than it's been in some time. If ever there were a time to bet on Ingersoll-Rand's renaissance, this is it.

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At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.