Ingersoll Rand Inc.

Moat: 3/5

Understandability: 4/5

Balance Sheet Health: 4/5

Ingersoll Rand is a global industrial company, providing air, fluid, energy, and medical technology solutions. Its products are used in various industries, including industrial manufacturing, food and beverage production, and healthcare.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview:

Ingersoll Rand operates in two main segments: Industrial Technologies & Services and Precision and Science Technologies.

Industrial Technologies and Services (ITS): This segment provides a broad range of products, including compressors, blowers, vacuum pumps, fluid management systems, power tools, and related equipment. These products are used for various industrial processes, energy management, and manufacturing, among others. The revenue drivers are industrial production levels, construction activity, and overall economic conditions. The company’s customers typically purchase high-quality, durable, and high-performing equipment that must meet critical manufacturing or energy requirements, making reliability and brand name important. This division is known for its durability, wide customer base, and distribution network, and is the largest of the two divisions.
Precision and Science Technologies (PST): This segment is more specialized, offering precision tools, fluid management systems, specialty pumps, and scientific instruments. Key end-markets include the analytical, life science, and semiconductor industries. Customers in the segment are especially selective in their choices for these applications because of the high cost of failures. The company provides its products on a global scale and is known for having precision-engineered products, with strong brand names, and a recurring revenue stream in consumables and services. This segment is also known for high margins and strong R&D capabilities.

Recent Developments:

In 2022, the company completed acquisitions of SeeAir, Sterling Fluid Systems, and Dosatron, for a combined $650 million.
On August 1, 2023, the company completed the acquisitions of SPX Flow Technology, or “SPX FLOW” for aggregate consideration of $3.7 billion.
As of September 30, 2023, the Company employed approximately 16,600 people worldwide.

Financial Performance (Recent Focus is on 2023 data): Ingersoll Rand (IR) has shown robust financial performance. Revenues have increased 13.1% compared to the same period in 2022. The adjusted operating income margin came in at 23.5%. The business also reported a healthy growth in orders, which demonstrates good demand for its products. They have reiterated their full-year 2023 financial guidance on organic growth of 9-11% and Adjusted EBITDA margin of 26-27%. This has been driven by consistent operational efficiency, pricing power, and strong demand.

Revenues: In the third quarter of 2023, the company posted consolidated revenue of $1.58 billion. This strong revenue performance was primarily due to a 9.1% organic growth increase and further benefit from acquisitions.
Profitability: Adjusted gross margins increased to 46.4%, and the Adjusted EBITDA margin was a healthy 27.5%. The adjusted earnings were 0.72 per diluted share. The company’s ability to drive margin expansion is notable. Adjusted EPS has shown strong growth and is a strong sign.
Cash Flow: They generated strong free cash flow in the third quarter, with cash flow from operations reaching $308.3 million, and adjusted free cash flow reaching $278.9 million. Free cash flow shows the efficiency of their operations.
Guidance: They have reiterated the financial guidance, despite a slowdown in some of their end markets, expecting 9-11% organic growth, adjusted EBITDA of 26-27%, adjusted EPS of $2.72-$2.77, and free cash flow conversion of >90%. A full year forecast based on guidance gives strong numbers and growth for the company.

Moat Rating: 3 / 5 Ingersoll Rand possesses a narrow moat due to a combination of factors:

Brand Reputation: Both segments benefit from the high reputation for reliability, durability, and innovation. The brands are well-recognized and respected by customers in their respective industries.
Proprietary Technology: Its products often use patented technology or specific designs that are costly or complex for competitors to replicate. The result is that they typically have better product performance or quality than competitors.
Customer Lock-in: The company serves long-term customers who are unlikely to switch. Switching may involve added costs for retraining and implementation.
Distribution Network: Their distribution network is extremely wide and makes up a decent advantage.

The company benefits from some of the advantages associated with the above moat strengths in both their core segments. However, they are unable to create higher margins than competitors as a whole, and their returns on invested capital are good but not great compared to other high-moat businesses. Their revenue stream is strong and stable though. I’m giving a narrow moat because they have all the signs of creating a high moat business, but they are unable to get extraordinary profits due to the competition and nature of the industry.

Legitimate Risks to the Moat and Business Resilience:

Economic Downturns: Demand for Ingersoll Rand’s products is tied to the health of the global economy. During economic downturns, companies may reduce investments in capital equipment, hurting the revenue. Despite being fairly steady during the downturn in 2020, it was still very important to manage the business and be nimble to quickly recover. Any new prolonged downturn could similarly damage the company.
Intensified Competition: As the market consolidates, there’s a growing threat of competitors aggressively competing for market share. This trend has the effect of diluting prices and lowering profit margins, requiring consistent innovation to maintain the advantages.
Technological Disruption: Their current core business could be heavily disrupted if a new competitor offers a different or superior technology than what is currently sold. This could render their current products obsolete and useless. It’s important for the company to stay on top of trends in technology and innovation.
Supply Chain Disruptions: They are a very diversified manufacturer, which means that disruption to their supply chain could have huge effects. They have started a dual sourcing program in order to mitigate this risk.
Acquisitions: Many of their past growth periods have come from acquisitions. If the company doesn’t integrate or utilize those acquisitions effectively, that could have a serious impact on future growth and profitability. The company also tends to pay high prices for acquisitions, that may mean poor returns later on.
Customer Concentration: Some of their revenues and business may come from key customers. The risk is that they can lose revenue and market share if they lose a key customer.

Business Resilience: Ingersoll Rand has shown great resilience over the years, particularly during the COVID-19 downturn. The company had solid operating margins, and has been growing by acquisition as well. This shows their ability to adapt, while still generating sustainable revenues and cash flow. Their strong and wide customer base, and their focus on recurring revenues and services, as well as diversified markets, add to their business resilience.

Understandability: 4 / 5

Ingersoll Rand is a fairly easy company to understand for a few reasons:

They operate in established industries, meaning it’s easy to recognize their business and their product types
Their business model is simple: they provide industrial solutions, using their engineering prowess and long-term experience in manufacturing and servicing machinery.
They release easy to understand reports, and their businesses and strategy are fairly straightforward. The complexity comes from a full valuation, where you would need to deep dive into their financial statements to model out the future.

Balance Sheet Health: 4 / 5

Positive Indicators: The company has a decent debt-to-capital ratio, which shows their capability to meet its financial obligations. They also have ample liquidity with a cash balance of $2 billion. Their debt level has increased to around 44% in their most recent report. The overall stability is good despite the increasing leverage.
Negative Indicators: They have a considerable goodwill and intangible amount of over $11 billion, which may have an impact on valuation, though they have been actively amortizing these. In the face of high interest rates, the company has stated that its long-term debt is being hedged, with the company not expected to refinance until 2025. Overall, their balance sheet is a little bit leveraged compared to a pure cash-flow generator, therefore their score isn’t a perfect five.

Overall, Ingersoll Rand has a fairly healthy balance sheet and manages risk effectively.

Conclusion

Ingersoll Rand has several strengths and is well-positioned to continue its current growth trend. They’re actively innovating and growing both organically and inorganically, while having strong margins and solid demand for their products, all signs of their business acumen and value proposition. The company may benefit from its moat, which is still being solidified. However, they face some risks from the current global economic climate and their position in the highly competitive industrial sector. Their strong growth and business model, combined with its strategic acquisitions and shareholder-friendly attitude, make the business look compelling. It is important that they continue to invest in their technological edge and maintain their competitive advantages. The latest reports give a positive outlook for their financial prospects for the next few years, especially when incorporating the ongoing integration of its recent acquisitions. Overall, a fairly simple company to understand, with a good but not great moat, and a healthy balance sheet.