Boring and Undervalued — Perfect!

Ingersoll Rand may be a snoozer -- but its cash flow is a dream

By Lawrence Meyers, InvestorPlace Contributor

I love few stocks more than those that are so boring, so unsexy and so utterly unfascinating that I need a double espresso when writing about them. Peter Lynch also loved these types of companies because they were often very successful for decades and rewarded shareholders in a slow and steady manner.

Ingersoll Rand (NYSE:IR) is a name you probably recognize in the refrigeration, heating, ventilation and air conditioning world. Its brand names may also be familiar, such as Thermo King and Trane on the commercial side.

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Ingersoll Rand also makes portable security systems and remote home-management products under yet other familiar names: American Standard and Schlage (the former is also associated with toilets you often see in commercial places like restaurants).

The company’s Industrial Technologies segment offers compressed-air systems, tools, pumps and fluid and material handling systems, as well as golf, utility and rough-terrain vehicles. The brand names associated with these products are Club Car, Ingersoll Rand and ARO.

So, while IR isn’t exactly a conglomerate, it’s reminiscent of a company like Tyco (NYSE:TYC), and consequently, Ingersoll Rand is all about my favorite topic: cash flow. The free cash flow numbers from 2009 to 2011 are $1.5 billion, $515 million and $940 million, respectively. That cash flow allows it to easily service its $2.27 billion in debt (down from $2.87 billion in the previous quarter), which itself is offset by $929 million in cash.

Adjusted earnings per share were $1.07 in the just-reported quarter, up from 81 cents last year, beating estimates by 8 cents. This is notable because revenue was actually down a sizable 8.1% year-over-year, but management runs the operation so efficiently that they were able to control costs and inventory, and even bumped margins up by 10 basis points.

Management still expects free cash flow of a billion dollars this year. It’s a testament that, despite revenue declines, they can still generate great cash flow, pay down debt and increase EPS.

On 2012 estimates of $3.20 per share, and a compounded expected growth rate of 12.7% (including dividends), we’d expect 2017 earnings of $5.82. Placing a 12.7x valuation on it, the five-year price target is $74. With the stock at $46, that’s a 60% increase from here. IR’s strong balance sheet, excellent cash flow and smart management means little downside risk from here.

It’s hard to find direct competitors, but I’d consider all of these companies to be the sharks Ingersoll Rand is fighting: the equally boring but slower-growing Johnson Controls (NYSE:JCI); Honeywell (NYSE:HON), with its own environmental control units; and United Technologies (NYSE:UTX), which owns the Carrier brand of HVAC systems.

As of this writing, Lawrence Meyers didn’t own any securities mentioned here.

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