Nomura On Industrials: Upgrades Ingersoll-Rand To Buy

Nomura’s Jonathan Wright upgraded the rating on Ingersoll-Rand PLC IR to Buy, while raising the price target from $56 to $68.

CRI As A Measure Of Business Quality

Wright explained that although cash return on investment (CRI) had been identified as the “best measure of a business’s underlying quality, the extent to which it is correlated with valuation is nonetheless striking.”

Based on an analysis of 20 of the largest industrials in the U.S., Wright calculated that a 0.99x correlation existed between a business’ CRI and the multiple assigned by the market to that company’s “real” assets.

“This suggests that CRI is an excellent predictor of “fair value,” a measure that can be used to identify underappreciated or overvalued assets with much greater accuracy than relative P/E or EV/EBITDA multiples, which are both subject to distortion by divergent tax rates and accounting treatments,” according to the Nomura report.

IR Biggest Outlier

Using this framework, Wright identified Ingersoll-Rand as one the biggest outliers, currently trading at a more than 25 percent discount to its “fair value.”

The analyst also estimated that the company deserves to trade at an 11x EV/EBITDA multiple, meaningfully higher than the current valuation and towards the high end of the peer group range.

Pointing out that Ingersoll-Rand’s recent multiple compression was inconsistent with “the group’s margin-driven improvement in CRI,” Wright mentioned that productivity gains in Climate were likely to be sustainable, “which coupled with stabilizing Industrial end markets and resilient construction exposure, represents an attractive value opportunity.”