Ingersoll Rand A (NYSE:IR)
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5 Years : From May 2011 to May 2016
Activist investor Nelson Peltz will likely have difficulty leveraging his big stake Ingersoll-Rand PLC (IR) into a quick and comprehensive overhaul of Ingersoll's business portfolio, analysts predicted Wednesday.
In a regulatory filing Wednesday that disclosed a 7.1% stake in Ingersoll's stock, Peltz's Trian Fund Management LP said it plans to engage in talks with Ingersoll executives to press its case for enhancing "shareholder value by ... considering various strategic alternatives, including a restructuring of [the company's] key business segments."
Trian did not outline specific strategies, but Peltz has a record of lobbying for asset sales and corporate breakups to pump up flagging stock prices. Trian also noted that it will push for the "addition of several new independent directors" for the Ingersoll board and aligning "management compensation with the [company's] performance."
Peltz is the latest activist investor to wade into industrial stocks in search of big returns from companies some consider laggards. Other recent activist forays include Carl Icahn's large stakes in truck makers Oshkosh Corp. (OSK) and Navistar International Corp. (NAV) and Relational Investors LLC's stake in Illinois Tool Works Inc. (ITW).
But Icahn's attempt to install an alternative slate of Oshkosh directors was soundly rejected by shareholders in January. ITW granted a seat on its board to one Relational's co-founders in exchange for the investment-management firm's pledge to refrain from a proxy fight. Illinois Tool recently outlined a plan to focus its business portfolio on higher-growth companies. But the strategy is likely to take years to execute as ITW methodically evaluates hundreds of businesses and sells units that don't fit into its plans.
"The industrials seem to be attracting these activists, but none of the situations that we've seen has really been effective," Stephen Volkmann, an analyst for Jefferies & Co., said Wednesday.
Peltz's intervention comes at a time when Ingersoll's stock price is soaring. The stock is up 46% since the beginning of the year, compared to 7.7% for the Standard & Poor's Composite Index. In New York Stock Exchange trading Wednesday, Ingersoll rose 5.4%, closing at $44.54 a share.
Volkmann said he is skeptical about Peltz's ability to be the catalyst for significant improvement at Ingersoll. While Ingersoll's performance has trailed its multi-industry peers in recent years, analysts add there are no immediate remedies for the company's anemic profit margins and sluggish sales growth. Many of Ingersoll's businesses are in highly cyclical industries or dependent on long-slumping sectors such as residential and commercial construction.
Ingersoll's businesses lines include Trane heating and air conditioning equipment, Club Car golf carts, Thermo King truck trailer refrigerators, Schlage door locks, and pneumatic power tools.
Analysts say the profits generated by individual parts of the company aren't compelling enough to justify the creation of new, public companies that could be spun off to Ingersoll shareholders. It's a strategy used by ITT Corp. (ITT) to dismantle itself last year and Tyco International Ltd. (TYC) is pursuing a similar breakup later this year.
Ingersoll has sold businesses in recent years, most notably its construction equipment business in 2008. It sold a majority stake of its Hussmann refrigerated-case business last year to private-equity firm Clayton Dubilier & Rice LLC for $370 million. Although Ingersoll used the proceeds from the sale to buy back its stock, the company's inability to sell no more than a 60% share of the business was perceived as an indication of Hussmann's diminished value.
Some analysts have suggested the company consider selling Club Car. But the tax ramifications of a sale could dampen the benefits for Ingersoll, which is headquartered in Ireland.
Nevertheless, observers say pressure from Peltz could be beneficial for the company, which has a reputation for inefficient operations that are difficult to improve.
Chairman and Chief Executive Michael Lamach last year was forced to abandon an ambitious set of goals that included earnings per share of $5 to $5.75 in 2013 and an operating margins of 15% to 17%. For 2011, Ingersoll reported earnings per share of $1.01. Meanwhile, its first-quarter operating margin was 6.7%, down from 7.6% a year earlier.
Peltz's intervention in the Ingersoll "shouldn't be too surprising," said Deane Dray, an analyst for Citi Investment Research. "The conditions are ripe. You've had a company that has chronically underperformed."
-By Bob Tita, Dow Jones Newswires; 312-750-4129; firstname.lastname@example.org