Stock Analysis
- United States
- /
- Machinery
- /
- NYSE:IR
A Look At The Intrinsic Value Of Ingersoll Rand Inc. (NYSE:IR)
Key Insights
- Using the 2 Stage Free Cash Flow to Equity, Ingersoll Rand fair value estimate is US$102
- With US$91.64 share price, Ingersoll Rand appears to be trading close to its estimated fair value
- Analyst price target for IR is US$101 which is similar to our fair value estimate
Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Ingersoll Rand Inc. (NYSE:IR) as an investment opportunity by estimating the company's future cash flows and discounting them to their present value. This will be done using the Discounted Cash Flow (DCF) model. Don't get put off by the jargon, the math behind it is actually quite straightforward.
We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.
See our latest analysis for Ingersoll Rand
Is Ingersoll Rand Fairly Valued?
We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
Generally we assume that a dollar today is more valuable than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today's dollars:
10-year free cash flow (FCF) forecast
2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | 2034 | |
Levered FCF ($, Millions) | US$1.45b | US$1.57b | US$1.72b | US$1.84b | US$1.93b | US$2.01b | US$2.09b | US$2.16b | US$2.23b | US$2.29b |
Growth Rate Estimate Source | Analyst x8 | Analyst x7 | Analyst x1 | Analyst x1 | Est @ 5.10% | Est @ 4.32% | Est @ 3.78% | Est @ 3.39% | Est @ 3.13% | Est @ 2.94% |
Present Value ($, Millions) Discounted @ 6.9% | US$1.4k | US$1.4k | US$1.4k | US$1.4k | US$1.4k | US$1.4k | US$1.3k | US$1.3k | US$1.2k | US$1.2k |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$13b
The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.5%. We discount the terminal cash flows to today's value at a cost of equity of 6.9%.
Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = US$2.3b× (1 + 2.5%) ÷ (6.9%– 2.5%) = US$54b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$54b÷ ( 1 + 6.9%)10= US$28b
The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is US$41b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of US$91.6, the company appears about fair value at a 9.8% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.
The Assumptions
We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Ingersoll Rand as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 6.9%, which is based on a levered beta of 1.060. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.
SWOT Analysis for Ingersoll Rand
- Earnings growth over the past year exceeded the industry.
- Debt is not viewed as a risk.
- Earnings growth over the past year is below its 5-year average.
- Dividend is low compared to the top 25% of dividend payers in the Machinery market.
- Annual earnings are forecast to grow faster than the American market.
- Current share price is below our estimate of fair value.
- Annual revenue is forecast to grow slower than the American market.
Looking Ahead:
Whilst important, the DCF calculation is only one of many factors that you need to assess for a company. The DCF model is not a perfect stock valuation tool. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Ingersoll Rand, we've put together three further aspects you should explore:
- Financial Health: Does IR have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
- Future Earnings: How does IR's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
- Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!
PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NYSE every day. If you want to find the calculation for other stocks just search here.
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Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
About NYSE:IR
Ingersoll Rand
Provides various mission-critical air, gas, liquid, and solid flow creation technologies services and solutions worldwide.