Ingersoll-Rand: Buy or Sell?

On Sept. 14, Citigroup initiated coverage on Ingersoll-Rand, calling the stock a “sell.” Two weeks later, though, Credit Suisse and Sanford Bernstein initiated their own coverage of the company but announced IR was a “buy.” So who’s right?

Not Citigroup, Cramer said Monday. Here’s why:

Citi thinks Ingersoll-Rand’s too much exposed to the latter parts of the business cycle, meaning it’s too early in the recovery for the company, a mishmash of different industrial-focused divisions, to benefit. Specifically, Citi is worried about IR’s commercial construction business, which is where 50 percent of Ingersoll-Rand earns its sales.

There are two problems with this line of thinking, though. One, and most basically, if Ingersoll-Rand truly is a late-stage play, then now is the time to buy. Better to get it cheaper rather than later when the move has already taken place. And two, IR in its July quarter showed an 7-percent uptick in commercial heating, ventilation and air conditioning orders, the first since Q3 of 2008. This seems to indicate a bottom in commercial construction. Not to mention, 60 percent of Ingersoll’s commercial HVAC revenues come from parts, services and replacement, while new construction accounts for just 18 percent. The takeaway?

IR “doesn’t need a full-blown recovery in order to make boat loads of money,” Cramer said.

The “Mad Money” host also brushed off Citi’s concern over IR as a company in transition. If anything, Ingersoll’s made itself less cyclical and better able to profit regardless of the economic environment. Cramer also defended IR’s strong concentration of business in North America, saying it would allow Ingersoll to benefit from faster growth in those markets, especially as more and more construction is being done with the modern control systems that IR makes.

Citi also doubts that Ingersoll-Rand will meet its own margin targets of 15 percent to 17 percent by 2013, but the analyst there is viewing the company through an outdated lens. Instead of seeing IR for the changed entity that it is, Citi sees only past performance. But even if Citi’s numbers are right, the Street still expects only 11 percent, which is lower than IR’s historical average margins of 12 percent.

“I think the expectations are still very low, certainly low enough to beat,” Cramer said, “especially given all the streamlining and cost-cutting this company has done.”

Citi even harped on the valuation, despite the fact that IR is trading at a 12-percent discount to its peers. Sure, the stock trades above the midpoint of its historical relative price-to-earnings multiple range, but again, this is a different company. So Cramer’s siding with the guys at Credit Suisse and Sanford Bernstein.

“If IR can earn $5 a share in 2013,” he said, going off the estimates offered by those two research firms, “then this could be a $50 plus stock masquerading as a $38 stock.”

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