Ingersoll's Increased Focus On HVAC May Help It Thrive In The 'Industrial Recession'

The brokerage's bullish thesis is centered on "1) a reasonably valued stock; 2) huge upside potential for returns; and 3) HVAC orders and backlog that provide great visibility through 2017."

Justification For Bullishness

Analyst Joel Tiss said, "New products, cost cutting, improving operating processes, pent-up demand and the push into parts and services should drive double-digit EPS growth, thereby allowing for consistency in meeting (or beating) expectations and creating shareholder value."

"Solid growth in the Climate segment and management's effective drive toward operational excellence provides the basis for Ingersoll to continue over delivering on its 10-year transformation plan, leading to higher organic growth and strong margin expansion," Tiss wrote in a note.

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Furthermore, the company "continues to focus on recurring revenue streams, attacking geographic gaps in its portfolio, and executing on strategic acquisitions, which should further reduce the overall cyclicality of the company."

A Look Back And A Look Ahead

Over the past ten years, Ingersoll has shifted from a diversified industrial company to a more focused HVAC and air compressor company. The analyst said this transition is significant and became instrumental to the company's double digit earnings growth and impressive margin expansion over the past three years, a period that some have termed an "industrial recession."

CEO, Michael Lamach's plans focus on minimizing complexity and molding a lean company centered on higher sustainable margins and returns. The company introduced Business Operating System (BOS) and Product Growth Team (PGT) in to its culture.

The analyst said, "PGT brings together leaders within the company to encourage innovation and profitable growth." On the other hand, BOS is similar to processes embedded into the cultures of other companies and focuses on guiding decision making and execution.

Tiss' EPS estimates for 2016, 2017, and 2018 are $4.05, $4.50 and $5.00, respectively, which assume low-single-digit revenue growth and more than a 10 percent CAGR for EPS.

At time of writing, Ingersoll shares were up 0.79 percent on the day at $67.47.

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