According to a filing with the SEC, John Bruton, a member of the Board of Directors at Ingersoll-Rand PLC (NYSE:IR) directly purchased just over 1,100 shares of the company’s stock on February 19th at an average price of $53.41 per share. This gives him a little more than 3,600 shares, which means that in percentage terms Bruton increased his holdings by over 40%. Ingersoll-Rand is a $16 billion market cap residential and industrial machinery company (for example, it manufactures climate control products including air conditioners).
While we have been spending most of our time recently on our database of 13F filings and updating our investment strategies (we have found, for example, that the most popular small cap stocks among hedge funds outperform the S&P 500 by an average of 18 percentage points per year) we have kept an eye on insider purchases in large-cap stocks and noticed Bruton’s buy. Insider purchases have been found to be bullish signs (read more about studies on insider trading) and we think that this is because insiders have to be confident in the stock’s prospects in order to commit more of their own capital and ignore the benefits of diversification. Bruton had last bought shares in August 2012 at prices a bit below $45 per share (see a history of his insider activity).
Last quarter Ingersoll-Rand’s revenues dipped 1% from their levels in the fourth quarter of 2011. This was actually somewhat good news, as it was an improvement on the performance the company had experienced in the first nine months of the year; for 2012 as a whole, sales were down 5%. Margins were more or less unchanged resulting in a 2% decline in earnings for Q4. Ingersoll-Rand PLC trades at 16 times trailing earnings, which while not a high multiple is a bit more pricy than we would like to see for a company with a slightly declining or even a stable bottom line. Analyst estimates imply a forward P/E of only 13, which would be closer to value territory, but the sell-side may be being too optimistic.
Billionaire Nelson Peltz’s Trian Partners reported owning more than 13 million shares of Ingersoll-Rand PLC at the end of December (find Peltz’s favorite stocks) in its 13F filing for the fourth quarter of 2012. Relational Investors, managed by Ralph Whitworth, initiated a position of over 11 million shares between October and December (research more stocks Whitworth was buying) and billionaire David Shaw’s D.E. Shaw added to its own stake in the company (check out Shaw’s latest stock picks).
Ingersoll-Rand’s closest peer is Johnson Controls, Inc. (NYSE:JCI), which has a building interior controls as well as an auto parts business. Johnson trades at a premium to Ingersoll-Rand, with a trailing P/E of 19, and its earnings were actually down 17% in the fourth quarter of 2012 versus a year earlier. While that may be in part due to the auto related business, it certainly seems like a worse stock to buy on its face and it might be worth thinking about a pair trade here if further research backed Johnson as a more expensive but less attractive business.
We can also compare Ingersoll-Rand to other machinery companies including General Electric Company (NYSE:GE), Eaton Corporation, PLC (NYSE:ETN), and United Technologies Corporation (NYSE:UTX). Trailing earnings multiples at these three companies are in the 16-18 range, so again on that basis the company at least seems competitive in value terms. However, all three of these peers can boast decent revenue growth rates, including over 10% at GE and UT, and net income figures have generally been higher as well. As a result they may be more fertile ground for value investors; in addition, if Johnson does look to be a good short, GE or UT would likely be better choices for the long side of any pair trade.
The insider purchase at Ingersoll-Rand is a plus, but in absolute terms- and certainly compared to at least some similar companies- the valuation implies considerable growth over the next couple years and this is not what the business has been doing recently. As a result we are skeptical that it truly is a good buy right now.
Disclosure: I own no shares of any stocks mentioned in this article.
