Over the last six months, Ingersoll Rand’s shares have sunk to $78.59, producing a disappointing 16.4% loss - a stark contrast to the S&P 500’s 12.3% gain. This may have investors wondering how to approach the situation.
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Why Is Ingersoll Rand Not Exciting?
Despite the more favorable entry price, we don’t have much confidence in Ingersoll Rand. Here are three reasons why IR doesn’t excite us, plus one stock we’d rather own.
1. Core Business Falling Behind as Demand Declines
We can better understand Gas and Liquid Handling companies by analyzing their organic revenue. This metric gives visibility into Ingersoll Rand’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.
Over the last two years, Ingersoll Rand’s organic revenue averaged 1.4% year-on-year declines. This performance was underwhelming and implies it may need to improve its products, pricing, or go-to-market strategy. It also suggests Ingersoll Rand might have to lean into acquisitions to grow, which isn’t ideal because M&A can be expensive and risky (integrations often disrupt focus). 
2. Recent EPS Growth Below Our Standards
While long-term earnings trends give us the big picture, we also track EPS over a shorter period because it can provide insight into an emerging theme or development for the business.
Ingersoll Rand’s EPS grew at a weak 3.2% compounded annual growth rate over the last two years, lower than its 6.2% annualized revenue growth. This tells us the company became less profitable on a per-share basis as it expanded.
3. Previous Growth Initiatives Haven’t Impressed
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).
Ingersoll Rand historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 6.3%, somewhat low compared to the best industrials companies that consistently pump out 20%+.
Final Judgment
Ingersoll Rand isn’t a terrible business, but it isn’t one of our picks. Following the recent decline, the stock trades at 21.5× forward P/E (or $78.59 per share). This valuation multiple is fair, but we don’t have much faith in the company. We’re fairly confident there are better investments elsewhere. Let us point you toward one of our top software and edge computing picks.
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