Inside Wall Street: Sharks circling Ingersoll-Rand?

The impending spin-off at the global diversified industrial leader makes the stock even more enticing.

By Gene Marcial Mar 19, 2013 10:05AM

Arrow Up Nicholas Monu iStock Exclusive Getty ImagesSome of the big guns in the investment world have taken large stakes in Ingersoll-Rand (IR) in part because of the hidden value of its prized assets. The company has, not surprisingly, attracted a bunch of savvy major investors, including the billionaire activist investor Nelson Peltz.

Other big players in the stock include T. Rowe Price (TROW), which owns a 9.10% stake; Invesco (IVZ), which holds 7.28%; and Fidelity Management, with 7.18%.

With officers and directors holding only a 1% stake in the company, Ingersoll-Rand has pretty much become an appetizing target for the likes of Peltz, whose Trian Fund Management has taken a 7% interest. With his large stock ownership, Peltz pushed for a breakup of the industrial conglomerate into three publicly traded companies.

Management's response has been quick but deliberate: It has announced several shareholder-friendly steps that Wall Street has cheered, including spinning off its commercial and residential security unit with a plan of taking it public; repurchasing shares of up to $2 million of the company's stock; and raising the dividend by 31% to 21 cents a share.

The tax-free spin-off, which is expected to be completed in the fourth quarter of this year, has attracted investors because it hands to them, at no cost to them, shares in a new company that analysts estimate has an enterprise value of $4.6 billion.

The stock has been one of the market's super performers, steadily climbing from a low of $28 a share in September of 2011 to a record high of $55.39 on Mar. 14, 2013. Part of that big advance included the stock's 16% jump since the company announced the spin-off in December 2012. The stock closed at $55.04 on Mar. 18, 2013.

Some of the products of the security company to be spun off include electronic and biometric control systems, locks and locksets, exit devices, steel doors and frames, and door closers. Ingersoll-Rand won't have a stake in the spun-off company after it goes public. But it will retain the remaining three segments, which include some of the top brands in the industry, including Thermo King, Trane, American Standard, Schlage, and Club Car.

The products from the Climate Solutions unit provide energy-efficient refrigeration and HVAC to manage controlled-temperature environments in companies in 100 countries; Residential Solutions, whose products include mechanical and electronic locks and portable security systems; and Industrial Technologies, which offer compressed air systems, power tools and pumps as well as golf utility and rough-terrain vehicles.

The security business is Ingersoll-Rand's most profitable business with EBITDA (earnings before interest, taxes, depreciation, and amortization) margin averaging 20%, twice that of the margins of the other units, notes Joseph Cornell, president of the Spin-Off Research in Chicago.

The hope is the spin-off will be enough for Peltz, who was named to the board in August, to drop the idea of further breaking up the company. The spinoff, says Cornell of Spin-Off Research "will enable both companies to enhance value by allocating capital and deploying resources in a more focused way while preserving and increasing synergies within their businesses. At the same time, it will position the new security company to build scale and make the necessary investments for future growth," he adds.

Analyst Richard Tortoriello of S&P Capital IQ, who recommends Ingersoll-Rand as a "buy," believes the rebound in the U.S. housing activity will also boost Ingersoll-Rand's residential segment and expects commercial construction growth to follow soon after. His 12-month price target of $58 a share for the stock isn't far from where the stock currently trades, so he may have to revise upward his price objective.

Indeed, despite the stock's speedy advance since September 2011, the company's big stakeholders expect Ingersoll-Rand to hit higher levels as it adopts more shareholder-friendly moves.


Gene Marcial wrote the column "Inside Wall Street" for Business Week for 28 years and now writes for MSN Money's Top Stocks. He also wrote the book "Seven Commandments of Stock Investing," published by FT Press.

Tags: IR


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