Stock Watch
Ingersoll-Rand: Extreme Makeover
An old industrial company reinvents itself, and up go the shares.
April 4, 2005
Ingersoll Rand -- the company that helped build the Hoover Dam, carve Mount Rushmore and bore the English Channel Tunnel -- is reinventing itself. And its shares are showing more vitality than you might expect from a 134-year-old company.
When Herbert Henkel became chief executive officer in 1999, he did not like what he saw: an industrial-equipment company that sold mainly to construction, mining and energy firms, which Henkel says would slow their purchasing "at the first sign of economic weakness." And Ingersoll's businesses required enormous capital investments.
So Henkel set in motion an extreme makeover. IR unloaded slow-growing operations, closing 30 factories, and bought more than a dozen new businesses -- most of them in fast-growing fields, such as security and climate control.
Notably, Ingersoll sold its drilling unit last year, a move heavy with symbolism given the business's ties to the company's founding (Simon Ingersoll patented the first steam-driven rock drill in 1871). But sentimentality took a back seat. "We have to be very mindful that our responsibility is ensuring the future of the company," says Henkel.
It's hard to argue with the results. Overall, operating margins more than doubled since 2001, to 11.9%, well on their way toward Henkel's goal of 15%. In addition, 20% of the company's $9.4 billion in annual revenues now recur regularly, primarily from servicing and supporting products that it sells. And its climate-control and security-and-safety divisions, which aren't particularly sensitive to the economy's fluctuations, account for about half of revenues. Of the remaining industrial and infrastructure businesses, probably the most representative of the new, nimbler Ingersoll-Rand are Bobcat, a maker of light construction vehicles, and Club Car, which makes golf carts.
Last year, IR's sales grew 14% and profits rose 49%, to $4.98 per share, despite a sharp rise in the cost of materials, especially steel. As a result, the stock (IR) has been on the move. And Standard & Poor's analyst John Hingher thinks it could hit $100 in a year. At today's price, IR sells at a modest 14 times estimated 2005 profits.
In addition to solid growth in each of its four divisions, IR expects to benefit from a healthy surplus of cash. IR projects that it could have as much as $1 billion in cash on hand at year-end -- even after spending hundreds of millions on small acquisitions, buying back shares and boosting its dividend (the stock yields 1.3%).
--David Landis
