On Friday, Morgan Stanley (NYSE:MS) initiated coverage on Ingersoll-Rand (NYSE: IR) with an Equalweight rating and a price target of $97.00. The firm acknowledges Ingersoll-Rand as a standout in the U.S. Industrials sector for its consistent performance, particularly in its ability to improve margins by 75-100 basis points annually while integrating new acquisitions.
The company is recognized for its potential to accelerate revenue growth, especially with its advantageous position in the anticipated near-term short-cycle bifurcation due to its exposure to manufacturing capital expenditures and significant leverage to energy efficiency trends. However, the market has already factored in expectations for a return to mid-single-digit organic growth in the years 2025-26, which could limit the scope for upward revisions to forecasts.
Despite Ingersoll-Rand's strong performance, Morgan Stanley points out that there are risks associated with the company's significant exposure to the Asia Pacific and EMEA regions, which account for over 50% of its business, potentially impacting its stability.
Additionally, the company's recent push into the Life Science sector is seen as a double-edged sword, offering opportunities for total addressable market expansion and cross-selling but also introducing increased risk due to Ingersoll-Rand's smaller scale and lesser domain expertise in this area compared to its industrial operations.
The valuation of Ingersoll-Rand shares at 25.5 times next twelve months' earnings per share reflects a roughly 20% premium over the S&P 500 index, slightly below the approximately 25% long-term average. This valuation accounts for the risks associated with short-cycle recovery and the strategic move into the Life Science industry.
In other recent news, Ingersoll Rand (NYSE:IR) Inc. reported a record-setting second quarter for 2024, leading to an increase in its full-year guidance. This success is largely attributed to robust results across segments and the acquisition of ILC Dover (NYSE:DOV), projected to contribute approximately $220 million in revenue for 2024. However, the company has lowered its aerospace and defense revenue outlook by $30 million and reduced its organic growth expectations in China post the acquisition of ILC Dover.
Ingersoll Rand has also launched a $2.6 billion commercial paper program, providing additional financial flexibility, although no notes have been issued so far. In a move to remain competitive, the company has granted additional equity awards to its top executives, Vikram Kini and Michael Weatherred, following a thorough mid-year review of executive compensation.
These recent developments indicate a positive trajectory for Ingersoll Rand, despite challenges such as delayed orders for long-cycle projects due to EPC backlog, potentially pushing some projects into 2025.
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