Ingersoll-Rand's (IR) Profits Hurt by High Costs and Debts
We have issued an updated research report on Ingersoll-Rand plc IR on Jan 21.
This industrial machinery maker currently carries a Zacks Rank #4 (Sell). This is a revision from its earlier Zacks Rank #3 (hold). Its market capitalization is approximately $23.6 billion.
Let’s delve deeper and discuss what led to the company’s poor investment appeal.
Share Price Performances & Earnings Estimate Revision: In the past month, Ingersoll-Rand’s shares underperformed the industry, with respective yields of 11.4% and 14.4%.
Further, the company’s earnings estimates have been lowered during the same timeframe. The Zacks Consensus Estimate for earnings is pegged at $6.30 for 2019, reflecting a 0.2% decline from the 30-day-ago tally. It is worth mentioning here that the company’s estimates for 2018 remained unchanged at $5.58.
Ingersoll-Rand PLC (Ireland) Price and Consensus
Ingersoll-Rand PLC (Ireland) Price and Consensus | Ingersoll-Rand PLC (Ireland) Quote
Higher Costs and Expenses: Ingersoll-Rand’s cost of sales, and selling and administrative expenses increased 9.2% and 7.6%, respectively, in the third quarter of 2018. Increase in raw material costs, mainly due to the implementation of tariffs (Section 232 and Section 301), as well as inflationary pressures from high wage rates and freight charges along with restructuring costs, have been creating problems for the company. Further escalation in costs and operating expenses, if not controlled, can severely impact margins and profitability.
It is worth noting here that Ingersoll-Rand has been suffering from adverse impacts of high cost of sales and operating expenses for quite some time. In the last five years (2013-2017), the company’s cost of sales increased 2.4% (CAGR) and operating expenses grew 1.5% (CAGR).
Long-Term Debt: Ingersoll-Rand’s long-term debts were $3,740 million at the end of the first nine months of 2018, reflecting an increase of 26.5% from the 2017 level. Borrowing through long-term debts totaled $24.1 million in the first nine months of 2018 while interest expenses during the period grew 6% year over year.
We believe that further issuances are bound to increase the company’s debt levels. If unchecked, high-debt levels can prove detrimental to the company’s margins and profitability in the quarters ahead.
Other Woes: Geographical diversification is reflective of a flourishing business of Ingersoll-Rand. However, this diversity exposed the company to headwinds, arising from geopolitical issues, macroeconomic challenges and unfavorable movements in foreign currencies.
Stocks to Consider
Some better-ranked stocks in the industry are DXP Enterprises, Inc. DXPE, Twin Disc, Incorporated TWIN and Colfax Corporation CFX. While DXP Enterprises currently sports a Zacks Rank #1 (Strong Buy), both Twin Disc and Colfax carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Earnings estimates for DXP Enterprises and Colfax for 2019 while that for Twin Disc for fiscal 2019 (ending June 2019) have improved over the past 60 days. Positive earnings surprise for the last four quarters was 112.62% for DXP Enterprises, 220.64% for Twin Disc and 8.88% for Colfax.
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