Overall, the stock remains a buy given that the bright future prospects of the CDIY segment will help the company to offset any weakness in its security business given that non-res construction continues to display sluggish growth.
This company plans to spin-off its security segment
Given the softness in the non-res construction market and the non-synergistic nature of the security business, Ingersoll-Rand PLC (NYSE:IR) decided to spin-off this segment last December. The security operation, which is responsible for making locks and steel door frames, represents the smallest division of Ingersoll Rand with annual revenue of just $1.5 billion in 2012, forming just 11% of the company’s total revenue of $14 billion for 2012.
The new standalone company will have about $2 billion in annual revenue with $1.6 billion in commercial security (dependent on the non-res construction markets) and $400 million in residential. The separation process is expected to be completed by the end of the year and a Form 10 Registration Statement is expected to be filed in mid-June. The management anticipates $150 million to $200 million in separation costs with the majority being professional consulting fees (banking, etc.) and restructuring charges.
The remaining part of Ingersoll will have about $12 billion in annual revenue with 68% coming from the sale of new equipment, and 32% coming from aftermarket revenue. The biggest end markets will be North America non-res at 30% of sales, 21% industrial, 17% overseas non-res, and 15% transport refrigeration.
On an overall note, with residential tailwinds, share buybacks ($2 billion over the next three-to-four quarters or 10%+ of current float), and activist involvement, downside is likely muted at current levels. However, near-term catalysts seem limited as the industrial markets have slowed and an upturn in the commercial markets is not likely until late 2013 or 2014.
Final word
Clearly, security businesses are facing tough times in North America given the current slowdown in the non-residential construction markets. Tyco International Ltd. (NYSE:TYC) is the only company that is a pure play on the growth in the security market. However, given a solid capital-allocation plan and strength in residential markets, I am bullish on Tyco. Stanley Black & Decker, Inc. (NYSE:SWK) has other growing segments that will help it to face the declining income in its security business.
Zain Abbas has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
The article Are Security Companies a Safe Bet? originally appeared on Fool.com and is written by Zain Abbas.
Zain is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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