A month ago I wrote positively on Ingersoll-Rand (IR) when I realized that the estimated synergies from the Trane deal look very conservative, and the combined entity should break Ingersoll’s traditional cyclicality that came with the Bobcat heavy equipment line. Amid the Fed hoopla yesterday, Ingersoll reported very good results, and the stock has followed through higher after some positive economic data today.

I still don’t think investors are giving this company enough credit, though that might slowly be changing. Earnings from continuing operations came in on the top end of expectations, as the foreign side of the business was even better than anticipated - but more importantly, the entire package was enough to offset the weakness in domestic construction, which would have dealt a huge blow to Ingersoll in the past. Now, we’re looking at a company with firm guidance of $3.80-3.90/share this year, with the midpoint of that range giving the stock an 11.7x multiple.

Take that multiple relative to earnings growth, and Ingersoll-Rand looks very inexpensive - but this isn’t a low-quality grower, either. This company is a leader in climate control, and as Trane becomes integrated into the existing Ingersoll business, operating margin should continue to expand (up a full 100 basis points on an adjusted basis) and the exposure to the rest of world should continue to provide great incremental revenue. Ingersoll has said the end markets in Asia, Latin America, and Europe are all showing excellent demand growth, so in addition to the company’s business mix showing more consistently, the company’s global footprint should help hedge geographic economic risk.

I think earnings estimates are too low given how margins are expanding, and Ingersoll is more likely to earn $3.90-$4.00/share this year. With about 12% growth prospects, I think Ingersoll-Rand should have a 15x multiple, making this a $60 stock.

Last time I wrote about Ingersoll, I said to look for a pullback from $45 into the low $40s. That happened, we had a good earnings report, and the stock has run up a bit. While I don’t believe in pressing, I think this is a very good company trading at a highly reasonable price. Buy a little and look for dips to add, because I think this acquisition is getting all the respect Freeport McMoRan (FCX) was getting as it was set to acquire Phelps Dodge. Ingersoll-Rand is a leader in a number of well-positioned, profitable businesses, but it is trading like the heavy cyclical it used to be. Profit from the market catching up to reality.

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