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Ingersoll
Rand (IR, NYSE)
Sure, we expect
cyclical stocks to go up and down but what has been happening to the
old economy industrial companies like Ingersoll Rand, Phone: (201)
573-0123
is frankly ridiculous. Trading at trailing 11 times earnings
in spite of analysts' expectation of 13% growth next year, this is a
classic value play, nothing wrong with the company just most
investors are acting like there is a recession in the old economy
stuff just around the corner. Last time, IR dropped by 40% to 50%
from its high was back in the Gulf War recession of 1990. Less than
a year ago (when this stock was trading over $64), equipment and machinery
companies such Ingersoll Rand were cheap but attractive to
investors. The wisdom then was that a recovery of industrial companies will require new
plants, equipment and processes and that meant opportunity for IR.
Of course, no one said that recessions have to be short and
recoveries long. It could very well be that we are headed into a
recession by the end of this year or early 2001. There are many
reasons for that to happen. U.S. T-Bills have risen by nearly 200
basis points in a year, the U.S. Fed have stopped giving away money by tightening money supply
since the Y2K liquefaction and the consumer may have already spent
its credit card limit. In fact old economy which does include the consumer
has not been a big spender in this recovery anyway.
If there is a flicker of a forecast of what is to come, it has to be within the segment of our economy that did and does have
room to spend. And that segment is business. Corporations have
primarily gotten us out of the recession through their capital
spending, productivity boosting and exports. This is not a new
trend, it has been going on for over a decade. Engineering companies
like IR were instrumental in building branch plants around the globe
to take advantage of lucrative domestic subsidies, cheaper labor and cheap capital. In the last couple of years,
the cheap labor and capital has taken a dramatic downturn. While we
hear of recoveries, the sector performance says otherwise. Logic would
however dictate that if the recent growth has been sponsored by the industrial segment of our economies then recession
should also be a result of a slowdown in that segment. And no one is
talking about that yet.
Even if North America were to slip into a recession within a year spurred by our own lack of consumer
demand, the now more cautious developing world still needs cars,
houses and yes, golf; all the things we take for granted. And where there
is manufacturing, there should be Ingersoll Rand. Ingersoll-Rand
Company is a multinational manufacturer of primarily non-electrical
industrial equipment and components. The Company's principal lines
of business are air compressors, architectural hardware products,
automotive parts and components, construction equipment, golf cars
and utility vehicles, pumps, tools and transport temperature control
systems. For the six months ended 6/30/00, sales rose 6% to $4.16
billion. Net income from continuing operations rose 20% to $323
million. Revenues reflect sales improvements in most major products
lines.
The major risk to companies like IR is financial crisis like the one in
1998 spreading far and wide into the world. If countries in the developing world
again play with the fire of easy foreign capital to finance their expansion and consumption,
there could be a sudden drought in the need to build large
multimillion dollar plants. That would be detrimental to engineering
companies all over.
CHARTS:
The P/E chart values Ingersoll Rand at about fifteen times for an
average 91-day T-Bill price of 5.5%. The chart also shows what
to expect if inflation and interest rates shoot up dramatically.
Both the fear of recession and higher cost of capital work against the valuation of the stock. Currently the stock trades
at eleven times a low EPS number.
Curiously the full value is in the rang e of
$65, its 52 week high. Current price of low $40's is cheap. Assuming
that the analysts know what they are doing, a $4 EPS looks entirely
feasible.
SUMMARY:
The cyclical industrial group of stocks is behaving as if the
economic recovery spurred by capital spending boom may be over. That may be true for North America but what about the other
five billion people, they still need good quality consumer items.
The global infrastructure and industrial plant construction are not
about to halt suddenly because we already have too many of them. A sudden collapse of the capital availability may make
that feasible for the short term but that seems remote.
Following input were used to construct the P/E and
value charts; Beta 1.43, Return on equity 19%, Plowback 78%, Debt to Equity
40%, EPS range of $3.64 to $4.00
Last Updated July 29,
2000
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