Activist Targets Ingersoll Rand Shakeup Over Share Surge (Update 1)

Updated to include UBS, Wells Fargo analyst comments and additional data.

NEW YORK (TheStreet) -- An economic recovery and a 2012 share surge may not be enough for Ingersoll Rand (RAND) after the Nelson Peltz-run activist fund Trian Fund Management announced a 7.33% stake in the industrial conglomerate.

When unveiling its Ingersoll Rand stake, the investment fund headed by Peltz said that it would look to launch discussions with management on how to improve the 141-year old company's lagging earnings and shares.

While Trian indicated that it would push for some financial changes like share repurchases and an increase of the company's leverage, it left the door open for a much broader restructuring of the company's diverse portfolio of industrial, tools, compressed air and transportation units.

A Wednesday morning share surge and analyst reactions signal that Trian's investment may be positive for Ingersoll Rand's stock, however, a construction-based earnings rebound may be more likely than any radical changes brought on by the activist fund.

"We see upside this year as depressed construction end markets begin to recover, and as management continues to pursue margin improvement initiatives... More radical strategic alternatives (sale of a business, spin-off, separation, etc) are feasible, but we believe unnecessary given opportunities for further internal improvements," wrote UBS analyst Jason Feldman in a Wednesday note to clients.

Still, Feldman views the investment as a positive because as Trian advocates, Ingersoll Rand, "could safely be substantially more aggressive with share repurchases rather than focus on reducing leverage. We also believe there could be some opportunities to accelerate restructuring/cost saving initiatives."

In a filing Wednesday with the Securities and Exchange Commission, New York-based Trian said it has bought 21.9 million shares of Ingersoll-Rand and will seek active discussions with the Swords, Ireland-based industrial conglomerate on how to lift faltering shares and earnings.

"During these discussions, the Trian Group intends to communicate its view that while the Issuer has an attractive collection of businesses, total shareholder returns and profitability have lagged peers, and that there is an opportunity to enhance shareholder value by improving certain key financial, operational, compensation and corporate governance metrics and by considering various strategic alternatives, including a restructuring of its key business segments," Trian said in the filing.

While Ingersoll Rand shares have surged nearly 40% in 2012 on improving earnings and boosted expectations for its industrial and housing-related end markets, the company's stock is still off over 15% in the last 12 months. Ingersoll Rand shares were up by over 1% to $42.89 in early trading, as broad markets fell sharply.

"We view this as a likely short term positive for IR," writes Wells Fargo analyst Andrew Casey in a note to clients. He gives shares an outperform rating, meanwhile Feldman of UBS gives Ingersoll Rand shares a buy recommendation and a price target of $45. Overall, analysts polled by Bloomberg give Ingersoll Rand a price target of $45.18, on 12 buy recommendations, 10 holds and no sells.

Ingersoll Rand saw its first-quarter earnings swing to a $95.6 million profit, after it reported a $68.5 million loss in the same period a year ago. Still, in 2011, the company's profits were nearly halved to $343 million, even as revenue grew roughly 5% to $14.7 billion.

Peltz is known as an activist investor after taking large holdings in companies like Family Dollar (FDO), Kraft Foods (KFT) and Wendy's (WEN) and offering takeover bids or restructuring initiatives. In 2011, Family Dollar fended off a takeover offer from Peltz while Kraft Foods said it would spin off its snacks business to focus on its grocery store businesses.

In Trian's Wednesday filing, the investment fund suggested that it would push for Ingersoll Rand to increase its use of debt to launch a share buyback program and it would also try to better align management incentive's with the company's financial performance. Terms like "strategic alternatives" and the "restructuring of its key business segments" indicate that Trian Funds could push for much more sweeping change.

Activists and unsolicited takeover offers have played a big role in the recent turnaround of struggling large-cap companies. For more on recent examples of activism and share recoveries, see why a kinder, gentler activist emerged in recent the Nook and AOL deals with Microsoft .

Recently, Southeastern Asset Management, another Ingersoll Rand and Family Dollar investor, indicated it would take an active role in the governance of Chesapeake Energy (CHK), potentially pushing for a sale of the struggling oil and gas giant. For more on activist investments like Trian's Ingersoll Rand stake and Southeastern's Chesapeake Energy push, see why investors are betting on earnings as hostile takeover bids recede.

See 5 ways Chesapeake Energy can be saved from itself for more on how it can initiate a share turnaround.

-- Written by Antoine Gara from New York.