Last week, a pair of Wall Street firms initiated coverage of post-Trane-acquisition Ingersoll-Rand (IR) at neutral. Neutral. Maybe there was something on the mind of the research team at Lehman, but J.P. Morgan? I would like to see what those notes contained, and if any readers have a copy - my email is “jcullen -at- collegeanalysts.com”

Ingersoll’s stock has been under pressure of late after a Moody’s downgrade of the company’s credit rating due to acquisition-related debt, as well as the resignation of Ingersoll’s CFO following the merger. Volume has been extremely heavy, but I really see this sell-off as being a non-issue. The real story here is how significantly the market is underestimating the earnings power of the combined company, which will be a leader in the non-cyclical business segments of climate control and security.

In one of Jim Cramer’s books (I forget which one), he says that sometimes stocks that should be performing well - particularly ones that have undergone a big change in their business model - don’t often get the immediate recognition that they should, because veteran money managers are so accustomed to lumping them in with other groups. I think this is precisely what is happening to Ingersoll, and magnifying that is Ingersoll’s old industry type (cyclical construction) is currently highly out of favor, whereas Ingersoll’s new industry type (climate control) is a great business to be in. Ingersoll is trading for 9x earnings estimates, this for a company that should be a huge beneficiary of refrigerating the developing world for years (decades?) to come.

While it may take a couple quarters of earnings releases to see Ingersoll-Rand get the recognition it deserves, it will be worth the wait. Using a comparable like United Technologies (UTX) - another diversified noncyclical manufacturer - and one can justify a relative valuation upwards of 40% higher than Ingersoll’s current price. That’s a great return over a two-year period, and I think the stock could go even higher as the out-year estimates get raised by the same analysts who are tip-toeing around the stock because they’re afraid to come out positive without more visibility.

And as I’ve noted in passing before, the largest percentage increase in any stock listed on Berkshire’s last 13F was Ingersoll-Rand; possible validation that Buffett sees the value to be realized in climate control, which is a steady and growing business thanks to recurring revenues from service contracts. Don’t be surprised if Berkshire’s next 13F shows additional accumulations of Ingersoll given the sharp sell-off of late.

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Read the original analysis of Ingersoll-Rand (IR).