Ingersoll Rand: Improvement In Organic Growth And Continued M&A Momentum Should Drive Stock Higher

Investment Thesis - Ingersoll Rand Inc. is expected to see a recovery in organic revenue growth in the upcoming quarters, supported by an acceleration in organic orders and Marketing Qualified Leads (MQL) [2][7] - Megatrends such as reshoring and sustainability are anticipated to drive demand for the company's products, contributing to revenue growth [2][7] - The company's focus on digital initiatives and increasing recurring revenues is projected to enhance revenue growth in the medium to long term [2][13] - A healthy balance sheet provides financial flexibility for pursuing bolt-on M&A, which is expected to complement organic growth [2][15] - Margin improvements are expected from operating leverage, price increases, and moderating inflationary pressures, along with contributions from recent acquisitions [2][20] Revenue Analysis and Outlook - In Q1 2024, Ingersoll Rand's revenue increased by 2.5% year-over-year to $1.67 billion, with organic revenues declining by 0.8% year-over-year after adjusting for acquisitions and foreign exchange impacts [3] - The Industrial Technologies & Services (ITS) segment saw a revenue increase of 4.3% year-over-year, driven by acquisitions and slight organic growth [3] - The Precision & Science Technologies (PST) segment experienced a revenue decline of 4.9% year-over-year, primarily due to lower organic volumes [4][5] Orders and Backlog - Total orders in the TTS segment decreased by 3.6% year-over-year, with a book-to-bill ratio of 1.02x, indicating a stable backlog [4] - Organic orders in the PST segment were down 5.4% year-over-year, reflecting weaknesses in specific markets, although short cycle orders remained strong [5] Margin Analysis and Outlook - The company's adjusted EBITDA margin expanded by 290 basis points year-over-year to 27.5% in Q1 2024, benefiting from pricing increases and favorable product mix [16][20] - Future margin growth is expected from operating leverage, continued price increases, and a shift towards higher-margin aftermarket business [20] Valuation - Ingersoll Rand is currently trading at 28.38x FY24 consensus EPS estimate of $3.28, with a potential for upward revisions in revenue and EPS estimates due to improving organic growth [21][23] - The company is tracking above its inorganic growth targets, with management targeting a 400 to 500 basis points annual contribution from M&A [15][23] Conclusion - The company has strong growth potential driven by a healthy backlog, demand momentum from megatrends, and increasing recurring revenues, alongside favorable margin outlooks [25]