Trian Partners on Ingersoll Rand: Q1 Letter ~ market folly

Thursday, May 1, 2014

Trian Partners on Ingersoll Rand: Q1 Letter

Nelson Peltz's investment firm Trian Partners is out with its first quarter letter.  In it, we learn that they've turned over their portfolio a bit at the start of 2014.

They cut stakes in Allegion and Wendy's.  Trian also revealed that they've initiated a brand new position that's around 11% of NAV. 

They did not disclose the name of the company, though it sounds like they'll be coming public with the name at some point.  They describe the position as follows: "We believe the company has an attractive business model and secular tailwinds that could propel its already strong market shares.  However, (the stock) has underperformed its peer group as it relates to EPS growth, total shareholder return and margins."

Trian on Ingersoll Rand (IR): Q1 Letter

In other recent activity from this firm, we highlighted how Trian boosted its Ingersoll Rand stake.  Their Q1 letter talks about their IR stake:

"We have advocated in prior letters that the separation of IR’s Security division (Allegion plc) would better allow management to focus on the margin opportunity at its remaining Climate and Industrial segments. IR’s Climate Segment, which is 75% of total revenue, achieved just under an 8.5% EBIT margin in 2013 – well below UTX’s 15% EBIT margin in its comparable Climate, Controls, & Security division. Similarly, IR’s Industrial Segment, 25% of total revenue, achieved only a 14% EBIT margin in 2013 – well below Atlas Copco’s comparable Industrial & Compressor Technique segments. We believe that as a more focused company, IR will be better able to reduce the margin gap with its closest peers and drive high-teens EPS growth. IR management believes in the outsized earnings growth potential of the business and has guided to 85 to 100 basis points of annual margin improvement and a 15-20% EPS CAGR through 2016. At a valuation of 17.5x’s 2014 earnings, in line with the large-cap U.S. Multi-Industrial peers, we believe investors receive attractive earnings growth, commercial construction exposure, and a strategically valuable Irish tax domiciliation for no additional premium to peers. Going forward, we remain optimistic that management will continue to grow earnings. In fact, during 2013, segment level margins for Climate and Industrial increased 90   basis points year-over-year despite mixed end market growth and an organizational focus on completing the spin. On February 11, 2014, the company reported fourth quarter results and issued guidance for FY 2014. Guidance called for 3-4% revenue growth and a 14-20% increase in EPS despite the tax rate increasing from 15% to 25%. Furthermore, the Board initiated a new $1.5 billion share repurchase program and a 19% increase to its quarterly dividend. On April 23, 2014, IR released first quarter earnings which exhibited solid 4% organic revenue growth and a 13% increase in consolidated operating profits. Furthermore, management maintained the guidance on the year while issuing second quarter guidance above Wall Street consensus estimates. We remain optimistic that continued margin improvements, recovering end markets, and capital return will drive outsized shareholder returns from today’s trading levels.

On March 31, 2014, Nelson informed IR that he had decided not to stand for re-election as an   IR board director when his current term expires on June 5, 2014 due to other board commitments. Nelson joined the IR board in August 2012. IR expressed to us that Nelson is a valued member of the IR board and expressed its appreciation for his contributions and service to the company. Trian continues to be a large shareholder and is very supportive of IR’s progress and plans to enhance shareholder value, as detailed above."

For more from this firm, head to Nelson Peltz's presentation on Mondelez.

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