Ingersoll Rand

Ingersoll Rand's second-quarter adjusted EPS of $0.86 beat the FactSet consensus estimate by $0.03. Second-quarter organic revenue was up roughly 4% in both segments.

Why it matters: Management reiterated its 2026 guidance but now expects adjusted EPS to be near the high end of the $3.45-$3.57 range. Although the guidance now bakes in organic revenue growth of 1%-3%, 1% higher on both ends, this was offset by lower expected margins. Second-quarter organic orders were up 2% thanks to a 7% increase in precision and science technologies, which was driven by low double-digit growth in life sciences. Industrial technologies and services organic orders remained flat due to headwinds in Europe and the Middle East. Management sounded upbeat on the call, highlighting that organic orders accelerated to double-digit growth in the first four weeks of July, which gives us confidence that the company can reach its updated 2026 revenue target.

The bottom line: We've maintained our $82 per share fair value estimate for narrow-moat-rated Ingersoll Rand, as our more optimistic revenue growth projections and the time value of money were offset by slightly more conservative margin assumptions. We see the company as fairly valued at current levels. Ingersoll Rand's second-quarter adjusted EBITDA margin compressed by 160 basis points year over year to 25.4%, as the firm struggled to offset cost inflation with price increases, mainly in China. Continued growth investments and higher corporate costs also weighed on margins. Ingersoll Rand ended the second quarter with around $3.8 billion of available liquidity, giving management optionality to deploy capital into acquisitions. We believe the company is well positioned to reach its goal of boosting 2026 revenue growth by 400 basis points-500 basis points through acquisitions.

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Following Ingersoll Rand’s second-quarter results, we are maintaining our $82 per share fair value estimate, as our more optimistic revenue growth projections and the time value of money were offset by slightly more conservative margin assumptions. Management reiterated its 2026 guidance but now expects adjusted EPS to be near the high end of the $3.45-$3.57 range. Although the guidance now bakes in organic revenue growth of 1%-3%, 1% higher on both ends, this was offset by lower expected margins.

Management's long-term targets include delivering revenue growth in the low double digits (including mid-single-digit organic growth and a mid-single-digit boost from M&A) and adjusted EBITDA margins of 28%-30% (compared with roughly 26% in 2023) by 2027.

We expect Ingersoll Rand’s organic revenue to grow at a roughly 5% compound annual rate over our explicit five-year forecast period. We also expect the company's capital deployment strategy to remain focused on M&A, helping drive total revenue growth to roughly 8% annually.

We project adjusted EBITDA margins expanding by about 250 basis points over the next five years, primarily due to continuous improvement initiatives and mix shift. We model a roughly 29.5% adjusted EBITDA margin for our midcycle assumption. We assume an 8.4% weighted average cost of capital and a 21% long-run effective tax rate in our model.

We believe that new Ingersoll Rand, formed through the merger of Gardner Denver and Ingersoll Rand’s industrial segment, merits a narrow moat rating based on intangible assets and customer switching costs. Both businesses were founded over a century ago and have established a reputation for quality and reliability. Each company has also built a large installed base of equipment that continues to generate aftermarket revenue, which we estimate accounts for roughly 36% of the combined firm’s sales. We think the combined business will benefit from a broader portfolio of complementary products, larger scale, and cost synergies from the merger, and we believe that Ingersoll Rand’s narrow moat will help the firm generate returns on invested capital exceeding its weighted average cost of capital throughout the next decade.

The cornerstone of Ingersoll Rand’s moat is its large installed base of equipment. The firm specializes in manufacturing mission-critical equipment that typically accounts for a relatively small fraction of the cost of an overall system but performs a vital function. Furthermore, Ingersoll Rand differentiates itself by offering equipment that reduces a client’s total cost of ownership by improving energy efficiency and offering superior reliability. Given the high cost of failure, this creates customer switching costs, as end users are reluctant to switch vendors given that the potential cost of unscheduled downtime and safety considerations. For instance, the firm manufactures blowers used to purify water at wastewater treatment facilities, and a product failure could result in the facility being shut down. Other examples include air compressors at factories and frac pumps, which typically account for less than 10% of the overall capital outlay, but any product failures could disrupt a customer’s operations.

As Ingersoll Rand’s products perform a critical function and are closely integrated within a customer’s production process, customers tend to replace components like-for-like. Therefore, the firm’s large installed base of equipment generates a relatively steady stream of recurring service and aftermarket revenue, which we estimate accounts for roughly 40% of the combined company’s sales following the merger.

Within its industrial and energy segments, many of Ingersoll Rand’s products are designed to work in harsh conditions, which leads to significant wear and tear. For example, fluid ends used in hydraulic fracturing pumps need to be replaced frequently due to their exposure to corrosive fluids and abrasive proppants. This leads to a substantial recurring revenue opportunity, as the total aftermarket sales throughout a product’s lifespan can represent a multiple of the initial cost outlay. Furthermore, aftermarket margins are typically higher compared with original equipment sales (roughly 500 basis points higher in Gardner Denver’s industrial segment before the merger). Ingersoll Rand further differentiates itself from competitors by its customer service. Given the mission-critical nature of its products, customers value the availability of replacement parts and the quality of a vendor’s repair service. As Ingersoll Rand has established a strong reputation for quality and reliability, we think it would be challenging for competitors to encroach on the firm’s installed base.

We believe that the introduction of Internet of Things offerings that complement Ingersoll Rand’s installed base of equipment will reinforce customer switching costs. For example, several years ago the company launched iConn, a software platform that remotely connects to compressors and vacuums. Such Internet of Things offerings are beneficial for end users as iConn allows Ingersoll Rand to perform predictive analytics and ensure that the equipment is adequately serviced when necessary, which helps prevent disruptions in the customer’s operations. At the same time, the company can benefit from increased aftermarket sales, as Ingersoll Rand said that iConn has increased the aftermarket opportunity for connected compressors by as much as 25%. As such, we believe that not only will digital solutions increase the stickiness of the business by offering software that complements the large installed base of equipment, but they also have the potential to translate into a meaningfully larger recurring revenue stream.

Furthermore, we believe that Ingersoll Rand benefits from intangible assets, including brand names, patent portfolio, customer relationships, and its reputation for quality. Ingersoll Rand distinguishes itself by focusing on energy efficiency and cost savings and highlights how its products can help lower operating costs and reduce a customer’s total cost of ownership. For example, the Runtech vacuum technology reduces energy consumption by over 50% and water consumption by over 90%. Before the merger, both businesses did a solid job refreshing their product portfolios, and we believe that the combination will result in a broader portfolio of complementary products and solutions that will solidify Ingersoll Rand’s competitive position.

Aftermarket revenue accounts for a much smaller fraction of the mix in Ingersoll Rand’s medical business, where it accounts for roughly 3% of sales compared with around 36% for the company overall. That said, the business has long-standing customer relationships to supply components to original equipment manufacturers, and multiyear contracts to provide solutions to OEM end devices are a source of recurring revenue in the segment. The firm often works closely with OEMs and is often involved throughout a device’s entire lifecycle starting with early design. Given the mission-critical nature of the end devices and the regulated nature of the medical market, Ingersoll Rand’s strong customer relationship are another moat source in its medical business.

Ingersoll Rand generates a healthy stream of recurring revenue, which accounts for roughly 36% of revenue.

The company has a solid record of driving margin expansion.

Ingersoll Rand is well positioned to maintain an active M&A strategy, thanks to its strong balance sheet.

The integration of Gardner Denver and former Ingersoll Rand’s industrial segment could prove more challenging and costly than management envisions, and the anticipated cost synergies from the merger could fail to materialize.

If industrial activity remains soft, organic revenue growth may prove to be elusive.

We expect the company to continue to pursue strategic acquisitions, and poor execution of its M&A strategy could destroy shareholder value.