When it comes to earnings, it's not just whether a company delivers or not that matters -- it's also about how it gets there.
Ingersoll-Rand, the Ireland-based maker of golf carts and air conditioning systems, reported second-quarter results on Wednesday that looked like a big win on the face of it. Earnings per share blew past analysts' estimates and the $17 billion company boosted its 2016 guidance. While revenue in the period was essentially in line with expectations, the performance was strong enough for Ingersoll-Rand to raise its sales forecast for the year, a big rarity this earnings season.
But there was no celebration party. Instead, Ingersoll-Rand's stock plunged by as much as 5.5 percent for the biggest intraday decline in a month. What gives?
First, a good portion of Ingersoll-Rand's better-than-expected earnings and improved guidance comes down to taxes: The company, which had been forecasting a 2016 tax rate of 24 percent to 25 percent, now expects it to come in at 22 percent to 23 percent.
Tax savings are part of Ingersoll-Rand's historical playbook; the company moved its legal headquarters from New Jersey to Bermuda early last decade and then took an Irish address in 2009. In April, it completed the sale of its remaining stake in Missouri-based refrigeration company Hussmann, which in theory should help bring its overall tax obligation down by reducing the amount of income subject to higher U.S. corporate rates.
But industrial investors have already shown little tolerance for companies relying on these kinds of benefits as opposed to delivering actual improvements. They sold 3M shares on Tuesday after some tax savviness -- and little else -- helped lift the Post-It maker's earnings per share just above analysts' estimates.
Ingersoll-Rand isn't in as bad shape as 3M, but the situation does raise legitimate questions about whether its better guidance is better in name only. William Blair analyst Nick Heymann estimates the lower tax levy should add about 14 cents to his prior 2016 EPS forecast of $4.10. But Ingersoll-Rand raised its guidance by just 5 cents on the low end and now expects to earn $4.00 to $4.10 a share on an adjusted basis. What this means is that its outlook for the remainder of the year has perhaps gotten a bit worse -- even if the actual numbers have gotten a bit better.
Remember that rosier sales forecast? That's only for reported revenue. If you back out the impact of M&A, currency swings and restructuring costs, organic sales growth is actually going to be weaker than the company had previously expected. That's in large part because the company is facing the reality of a deepening downturn in its industrial division -- which makes air compressors and mining hoists. Ingersoll-Rand is now expecting as much as a 5 percent drop in 2016 organic sales for the industrial segment, versus the 2 percent to 4 percent slump the company called for in the first quarter. One of the biggest hits has been in sales of its largest machinery, it said, which companies just aren't buying amid slow global growth and still-weak commodities prices.
This isn’t a knock on Ingersoll-Rand, which has proven yet again that it's a good operator in a position to wring growth out of volatile markets. But for anyone hoping the company would offer signs of a light at the end of the tunnel for the industrial and manufacturing economy, keep looking.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
As a side note, don't expect CEO Mike Lamach to think about breaking up the company and separating out the industrial business. On a conference call to discuss the company's earnings, he got rather passionate about why such a thing wouldn't be a good idea.
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