Billionaire Nelson Peltz Is Still Betting on Industrials

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After billionaire Nelson Peltz appeared at CNBC's Delivering Alpha conference touting his newest activist campaign, I was reminded of his other major holding. Peltz's next largest holding behind his newest PepsiCo and Mondelez positions is Ingersoll-Rand (NYSE: IR). Ingersoll made up over 15% of Trian's public-equity portfolio at the end of 1Q, and Trian owns just under 5% of the company.

Peltz got a big win for the industrial-machinery company near the end of 2012, when the company agreed to spin-off its security business, but the stock could still be offering investors solid returns. The company is trading at just 14.5 times forward earnings and generating returns on equity in excess of 13.5%.

At the end of 2012, Ingersoll announced it was spinning off its residential and commercial security businesses to shareholders. The new company will trade under the name Allegion. 

The company is shedding the security business (20% of 2012 operating profits), and will be left with its climate solutions (36% of operating profits). One of the key tailwinds for Ingersoll's climate segment relates to a rebound in the residential and commercial real estate market.

Other segments are residential solutions (7% of operating profits) and industrial technologies (27%). The industrial technologies division includes compressed air systems, power tools, pumps, and golf and rough-terrain vehicles. Even with the spin-off announcement, Ingersoll is only up 18.5% over the past six months compared to 13% for the S&P 500.

Revenue is expected to only be up 3% in 2013, but there is an underlying positive. Sales of residential solutions are expected to be up 6% on the back of a strengthening U.S. residential market.

Notable comps

Stanley Black & Decker (NYSE: SWK) is a diversified global provider of hand tools and power tools. The company, like Ingersoll, sought to narrow its focus last year, and sold its hardware and home improvement businesses.

However, the company used its $1.3 billion in proceeds from the sell-off to dive deeper into the industrial industry. During 1Q, Stanley acquired Infastech, which is a big play on the engineered-fastening industry in emerging markets. Stanley hopes to hit $15 billion in sales by 2015, with an operating margin exceeding 15% and 20% of revenue coming from emerging markets.

Johnson Controls (NYSE: JCI) supplies building controls and energy management systems, automotive seating, and batteries. The company has quite a diversified revenue stream, with three key segments. Building efficiency accounts for 34% of sales and includes facility systems for buildings.

Its auto segment generates around 50% of revenue and the power solutions group accounts for 15% of sales. The power solutions segment is the largest manufacturer of lead-acid automotive batteries.

The company managed to post EPS for fiscal 3Q of $0.83 compared to $0.63 for the same period last year. This comes on the back of 2% year-over-year revenue growth. The company is leaning on its battery business for future growth, in part, due to key tailwinds in the hybrid market. Other initiatives in this market include the acquisition of Delphi's battery business.

In addition to batteries, Johnson is focusing on seating in China, where it has over 25 auto-related manufacturing plants. It believes it has over 50% of China’s market share related to seating. 

Bottom line

Ingersoll is still trading on the cheap side despite being up 50% over the past 12 months. The industrial stock is trading sub-20 time earnings, where Johnson Controls is at 26.5 times and Stanley Black & Decker 32.5 times. What's more is that Ingersoll pays a 1.4% dividend yield that's only a 26% payout of earnings.  

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Couple the spin-off of Ingersoll's security business with the industrial company's solid recovery in its cash position, rising gross profit, dividend growth and strengthening return on assets, and it's hard not to get excited about this investment. 

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Marshall Hargrave has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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