Ingersoll-Rand Warns on Outlook

Ingersoll-Rand Co. reported disappointing quarterly earnings as demand fell for equipment used in home building and landscaping, and warned fourth-quarter earnings would miss analyst estimates.
 
The diversified conglomerate, whose shares fell nearly 4 percent, said it saw a "sharp deterioration" in North American demand for compact equipment, such as Bobcat machines, and reported slower demand for road machinery and security products used in home construction.

"It's a weaker number being affected by the economy, particularly the impact of the slowdown in the residential construction market," Longbow Research analyst Eli Lustgarten said.

The results came one week after Caterpillar Inc. reported weaker-than-expected third-quarter earnings and slashed its 2006 and 2007 forecasts, citing slowing demand for its earth-moving equipment and high raw material costs.

Ingersoll's third-quarter net earnings dropped around 4 percent to $243 million from $254 million. Earnings per share rose to 76 cents from 75 cents, reflecting lower outstanding shares.

The results included a previously announced tax charge of $27 million. Excluding the charge, profit totaled 85 cents a share, while analysts, on average, expected profit of 86 cents per share, according to Reuters Estimates.

Revenue was up 6 percent to $2.77 billion, but below estimates of $2.84 billion.

Ingersoll, whose products also include golf carts and store display cases, called the third-quarter performance "unsatisfactory" and said it is moving to cut costs and restructure businesses.

Ingersoll forecast fourth-quarter net earnings of 70 cents to 75 cents a share, or earnings from continuing operations of 74 cents to 79 cents a share. Analysts, looking for 93 cents, were revising downward their estimates.

"(Ingersoll's) miss and the lowered guidance is not a total surprise given last week's report by Caterpillar," Bear Stearns analyst Ann Duignan said in a note to clients. "The magnitude of the downturn in the compact equipment business, Bobcat, was however greater than expected."

Bobcat sales slid more than 20 percent, and the overall compact vehicle segment posted lower sales, profits and profit margins.

Chief Executive Herb Henkel said the company and its dealers were surprised by the speed and depth of the downturn. While Bobcat sales typically lag any dip in residential construction by as much as 13 months, there was no lag this time, Henkel told analysts on a conference call.

Dealers cut orders sharply to reduce inventories, Henkel said, and the company is cutting production to match demand.

When Bear Stearns' Duignan asked on the call whether the company could reach its target of double-digit 2007 earnings growth, Henkel said he could not give a simple yes or no answer.

He said weakness in the compact vehicles segment will likely continue into the first half of 2007, but the climate control and industrial segments were strong.

The company also needs to address raw material inflation, Henkel said, with costs rising much faster than Ingersoll had estimated.

Longbow's Lustgarten noted the U.S. economy appears to be growing at a more moderate pace, which translates into low- to mid-single-digit revenue growth, and earnings growth of 5 percent to 10 percent for the capital goods companies he covers.

The U.S. economy grew at an annual rate of 1.6 percent in the third quarter, the government reported on Friday, far below the 2.6 percent pace in the second quarter and much weaker than economists expected.

Companies with international exposure, like Ingersoll, are better positioned to weather the period of slower growth, which will last into the middle of 2007, Lustgarten said.

Shares fell $1.43 to $37.47 on the New York Stock Exchange, after falling to $35.90, its lowest level since Aug. 2.

Ingersoll shares have lagged the broader market this year as well as other industrial stocks, as measured by the Standard & Poor's industrial machinery index.

The stock is down more than 24 percent from its 52-week high in May.