One rather large and interesting provider of various products and industrial solutions is a company called Ingersoll Rand (IR). In recent years, driven largely by acquisitions of other businesses, the company has exhibited significant growth in revenue and growing cash flows. Fast forward to today, and the business truly is a juggernaut in its space. It boasts a market capitalization of $23.13 billion and it continues to expand largely through the purchase of small bolt-on opportunities to better round out its portfolio. This growth makes it slightly difficult to value the enterprise. But when all things are considered, the company likely is more or less fairly valued or is trading slightly on the lofty side. Because of this, while the company probably will exhibit further growth in the years to come, investors should not anticipate significant market-beating returns by buying into this company at this time.
An organization undergoing significant change
Today, Ingersoll Rand describes itself as a global market provider of mission-critical flow creation products and industrial solutions. The business offers a wide range of mission-critical air, fluid, energy, specialty vehicle, and medical technologies. It also provides services and solutions aimed at increasing industrial productivity and efficiency. Products the company sells include, but are not limited to, compressors, pumps, vacuums, and blowers. In all, the company boasts ownership over more than 40 major brands that include not only its namesake Ingersoll Rand brand, but also Gardner Denver. Sales generated by the company are made to companies and the transportation, medical and laboratory sciences, food and beverage, packaging and chemical processing industries, and many more. And its customer base is spread across over 175 countries.
In 2020, the company operated under a few key segments. The first of these is called its Industrial Technologies and Services segment. This is the segment the company sells its air and gas compression, vacuum, and blower products, as well as other related offerings. Next in line, we have the Precision and Science Technologies segment. This is responsible for a wide range of displacement pumps, fluid management equipment, and other related technologies. The company’s Specialty Vehicle Technologies segment sells golf, utility, and consumer low-speed vehicles under the Club Car brand. And its High Pressure Solutions segment cells positive displacement pumps, integrated systems and associated aftermarket parts, consumables, and provides related services.
Of course, it is important to note that things change over time. Today, the company really only has two segments. One of these is the Industrial Technologies and Services segment. And the other is the Precision and Science Technologies segment. In April of 2021, the company sold a 55% interest in its High Pressure Solutions segment in exchange for $300 million. And, in June of last year, it sold off its Specialty Vehicle Technologies segment for $1.68 billion. It is important to note, however, that the company does more asset acquisitions than it does sales. The largest of these was of Ingersoll Rand Industrial in 2020 in a deal valued at $6.94 billion. The company also engages in many small acquisitions. One of the most recent was of Tuthill Corporation’s Pump Group in a deal valued at $85 million that should bring $25 million in annual revenue to the business. And the most recent deal was of Houdstermaatschappij Jorc B.V. In exchange for 27 million euro that ultimately brought 13 million euro in annual revenue to the company.
Naturally, such a significant number of acquisitions and divestitures over a short window of time makes it a challenge to value the business. But the good news is that the general trend for the company has been for each year to be better than the year before. The only down year over the past five completed fiscal years was in 2019 when sales dropped to $2.45 billion from the $2.69 billion generated one year earlier. But between 2016 and 2020, sales generally increased, climbing from $1.94 billion to $4.91 billion. Much of the increase between 2019 and 2020 actually came from its purchase of Ingersoll Rand Industrial, with some of that increase being offset by lower volumes caused by weak demand across the company’s other properties. Growth for the business has continued into the 2021 fiscal year, with revenue in the first nine months of that year hitting $3.73 billion. That compares to the $2.76 billion generated one year earlier.
Profits have been all over the map for the company, with two of the past five years resulting in net losses for shareholders. But operating cash flow has generally increased, rising from $165.6 million in 2016 to $914.3 million in 2020. Over that same window of time, EBITDA also grew, climbing from $400.7 million to $1.02 billion. For the first nine months of 2021, meanwhile, the picture for the company has generally been looking positive. Its net loss in the first nine months of 2020 of $184.9 million morphed into a profit in the first nine months of 2021 of $269.5 million. Operating cash flow did drop, falling from $390.2 million to $380.9 million. But if you adjust for changes in working capital, it would have risen from $230.4 million to $732.6 million. And EBITDA during this window of time increased from $581.4 million to $849.8 million.
For the full 2021 fiscal year, management did say that revenue growth, excluding recent small acquisitions, should be in the high teens as a percent. And EBITDA should be between $1.175 billion and $1.195 billion. If we assume a similar growth rate for operating cash flow, that metric should come in at around $1.06 billion for the year. This allows us to price the company, assigning a price to operating cash flow multiple on the business of 21.7 and an EV to EBITDA multiple of 20.7. I generally like to look at the price-to-earnings multiple. But the extreme volatility of the company on this metric over the years makes me feel as though any measure would not be reliable.
To put the pricing of the company into perspective, I decided to compare it to five similar firms. On a price to operating cash flow basis, these companies ranged from a low of 12.2 to a high of 44.5. Four of the five companies were cheaper than Ingersoll Rand. Using the EV to EBITDA approach, the range was 5.7 to 19.9. In this case, our prospect was the most expensive of the group.
Company Price / Operating Cash Flow EV / EBITDA Ingersoll Rand 21.7 20.7 Welbilt (WBT) 44.5 19.9 Parker-Hannifin (PH) 17.6 14.2 Mueller Industries (MLI) 13.6 5.7 EnPro Industries (NPO) 19.4 13.4 Crane Co (CR) 12.2 9.7
No doubt, Ingersoll Rand is an interesting company that is shuffling around its portfolio in order to optimize value for its investors. It is obvious that the company is prioritizing growth and that is a good thing. While I wouldn’t say that shares are particularly expensive, I would say that they are lofty, especially relative to similar firms out there. And because of that, I would not say that the company is a home run at this time. At best it probably is fairly valued.