Industrial machinery conglomerate Ingersoll Rand (IR) will report second quarter earnings this morning. This is not an earnings preview post or comments about my expectations. Obviously this market is not right in the head, cookoo, insane, whatever you want to call it. So I’m not expecting the stock price to correlate with the fundamental story one way or another. I do want to point out to folks that Ingersoll Rand is a completely different beast that we’ve all known it as. No longer is it construction equipment or the road building machinery that we’ve all seen when driving around. While it still has a lot of those identifiably Ingersoll products, Ingersoll Rand went through a dramatic transformation this past year as it sold off Bobcat (small excavators and loaders) and acquired heating, ventilation, and air conditioning (HVAC) maker Trane.

Folks should forget the old Ingersoll Rand and focus on the newly-acquired Trane business as that should be the pride and joy going forward. Trane was such a big acquisition that Trane is now the dominant business for Ingersoll Rand, and rightly so. HVAC (heating, ventilation, and air conditioning) is a major component of both the infrastructure and energy theme, but a story which the media has chosen to neglect. Given the high energy prices, more attention should be paid to HVAC systems since the heating and cooling of buildings, homes, factories, etc. is actually the top user of energy in the U.S. All this talk of alternative fuels for our cars or solar power pales in comparison to the amount of energy we could save on heating and cooling buildings. Also, energy conservation rather than increasing energy production would lighten the load on our already failing power grid. Similarly, it would save costs as we wouldn’t have to build out our power grids and increase power generation capacities with new power plants, wind farms, solar panels, etc.

Last summer, I wrote an in-depth piece on this topic in Four Energy Efficiency Trades for a Cool Summer. I think it’s such a decently written piece that I’m not gonna do it again- just read it! But remember, Trane was a brand of American Standard at the time of the publication, but Trane is now part of Ingersoll Rand. So what was said about Trane now applies to Ingersoll Rand. In 2003, I was part of a team that conducted an energy efficiency study of the Keck Science Building of the Claremont Colleges (CA), working with both Trane and Johnson Controls (JCI) on proposed solutions. I can attest to the importance and viability of the HVAC system to increase energy efficiency.

For a closer look into the “new” Ingersoll Rand, Jim Cramer had a great Mad Money segment dedicated to it: The Great Transformation of Ingersoll-Rand. He explained it much better than I can. Take a gander. Or, read the segment’s transcript on Mad Money Recap.

Referenced Resources:

• Industrial 101: Industrial Products and Equipment for Dummies
• FERC Electric Power Markets: U.S. Government Data, Analysis, and Reports
• Jim Cramer’s Mad Money: The Great Transformation of Ingersoll-Rand
• The Great Transformation of Ingersoll-Rand Transcript
• Mad Money Recap

** Disclosure: I am long IR calls as of this post **

As readers of this site know, I am all about the infrastructure boom. Both for infrastructure growth to support the lighting speed growth in China, India, Mid East…and infrastructure repairs needed in the U.S. I am so convinced that this theme trumps all other investable themes out there that my portfolio is now concentrated on this theme, diversified only by the different components of the infrastructure buildout. First, my conviction is based on the fact that infrastructure is the foundation of modern civilization. We must keep our utilities running so we can have water and power. Witness the chaos in New Orleans after Katrina- New Orleans, a limited area, and yet the importance of our daily infrastructure necessities could not be more obvious. This leads to the second reason for conviction: governments must put infrastructure integrity as a top priority. Same for both the U.S., whose infrastructure needs massive repairs, and China, who is building cities daily. The fundamental need to have solid infrastructure means, to me, governments will finance these projects regardless of the economic conditions…baring a full scale global depression. Even in the depression, we completed big projects like the Hoover Dam, setting ourselves up for decades of power to fuel the growth in on the west coast. Thus, specific infrastructure plays should be relatively insensitive to the slowdown or recession if you look out 3-5 yrs. And although I’m don’t care much for the “long term” investment theories, for these companies you have to look out 3-5 yrs just because many of their projects take several years to complete. But yes, in the long term we’re all dead, so don’t just buy, hold, and forget!

POWER GRID

As just mentioned, the basic utilities are my #1 focus, and the power grid specifically.

“Demand for cable products in the developing regions of the world is being driven by high levels of energy infrastructure, construction and mining activities. Particular strength is coming from government sponsored infrastructure projects in Latin America and Southeast Asia. Additionally, the core infrastructure investment required for the upcoming 2010 World Cup soccer event in South Africa has added pressure to an already taxed energy grid that is also supporting growing mining activities in the region, resulting in increased spending for energy transmission and distribution as well as construction,” said Mathias Sandoval, President and Chief Executive Officer, General Cable Latin America, Sub-Saharan Africa and Mideast/Asia Pacific.” ~General Cable 2008 Q2 Earnings Release

I’ve written many times about the power grid, and the company ABB specifically as they’re one of the most exposed to this trend, but also because public companies with exposure to this theme has been hard to find. Woodward Governor, WGOV, this past quarter has shown to be a strong beneficiary in developing the wind power part of the power grid. I also like SPX corp (SPW) for its transformer business. Thomas & Betts (TNB) has a lot of the small electrical components and makes the huge towers for the transmission lines, but have yet to shown it is benefiting from the power grid repair and buildout. Possibly because a lot of it’s electrical components are also used in industrial and commercial buildings, which aren’t so hot anymore. Also, as more transmission lines are now buried underground rather than strung overhead by steel towers, TNB’s transmission tower growth might be limited. But other than that, it has been difficult to find suppliers of the “stuff” going into the power grid.

The most obvious “stuff” are the transmission lines we see everywhere. However, the biggest transmission line and cable producers, domestic and international, are divisions hidden within larger companies. For example, the biggest producer of copper cables is General Cable (BGC). However, it has so many other businesses and domestic infrastructure construction services that, to me, dilutes the value of the power grid cable business. Sort of like how GE’s finance division diluted the value of its strong global industrial and infrastructure business, but obviously not extreme. Note, though, that BGC bought Phelps Dodge’s copper cable business when Phelps Dodge merged with Freeport McMoran (FCX).

This growth was principally due to the acquisition of Phelps Dodge International Corporation (PDIC) in the fourth quarter of 2007, the Company’s exposure to global electrical infrastructure markets and favorable foreign exchange translation partially offset by lower demand as a result of ongoing weak economic conditions primarily in the United States and Spain which are major markets for the Company. ~General Cable 2008 Q2 Earnings Release

In this one move, copper cables now is the dominating business in BGC, and BGC’s sales will be mostly international- some 64% in the last quarter. The reserve I have of jumping into BGC is whether they have the ability to grow or has become a large supplier of a commodity for the power grid. I have limited slots for power-grid stocks, and BGC isn’t replacing my ABB, WGOV, or SPW yet.

Along the same lines,

South Korean cable maker LS Cable has received regulatory approval from the U.S., Spain and Germany to acquire copper wiring firm Superior Essex and create the third-largest global maker of magnet, communication, industrial and building wire with pro forma consolidated annual revenues of almost $13 billion. ~ LS Cable is Buying Superior Essex, Purchasing.com

Thus, confirming the value of companies supplying power grid components, but many of which are private, international, or subsidiaries of bigger corporations.

BRIDGES

Like the Power Grid story, our road infrastructure repair and upgrade isn’t a question of IF, but WHEN. While companies like Terex (TEX) have taken a beating with the rest of the market, understand that a big wave of demand for road construction equipment is coming, and soon.

“A report from the American Association of State Highway and Transportation Officials estimates that $140 billion is needed today to repair all the nation’s bridges. An Associated Press report cites Federal Highway Administration statistics that 152,000 out of the nation’s 600,000 bridges are either structurally deficient or functionally obsolete.

Nearly 25% of the nation’s bridges need repairs, and the average age of America’s bridges is 43 years — seven years shy of the maximum age for which most are designed, according to the “Bridging the Gap” report. One in five U.S. bridges is more than 50 years old.” ~Repairing Bridges would cost $140 Billion, Purchasing.com

The U.S. government is good at just focusing on short term problems or worthless issues, but as more roads crack and bridges collapse, there’ll be another panic to deal with another crisis, and companies like TEX may benefit more than if these road repairs were done right now. A construction/repair binge would likely cause shortages of equipment just as the mining binge now (from decades of neglect to invest) is causing shortages of Joy Global (JOYG) and Bucyrus (BUCY)’s underground mining equipment.

Referenced SuckingLess.com Research Tools:

• Industrial 101: Industrial Products and Equipment for Dummies
• FERC Electric Power Markets: U.S. Government Data, Analysis, and Reports

** Disclosure: I own shares of ABB, WGOV, SPX as of this post **

We all know the relief madness over the past week or so: oil got denied when it almost tapped $150 and dived to $123, taking down the rest of the commodities world- metals, agriculture, coal…you name it. Meanwhile, banks hit a trampoline and the XLF rebounded some 50% off the lows. Yes, it’s great to see gas here down to $4.59 from $4.89 just 2 weeks ago. Sure, maybe it’s the speculators the regulators have now caught, or maybe it’s money coming out to chase the banks off their lows.

But- what if it’s because China has halted a big chunk of it’s manufacturing to clear the air for the Olympics that starts exactly in 2 weeks? I haven’t figured out the effects yet. Just thinking what will happen starting September, when the Olympics are over, and the China manufacturing beast roars to life again? Devouring commodities for breakfast, lunch, dinner, and a midnight snack 7 days a week - because the Chinese are workaholics and wouldn’t know what to do if they had a day off? (I am serious - this is what my dad tells me from his business trips to China every 2 months) Sure, one could argue that China has been limiting it’s manufacturing to clean up it’s air since early in the year, yet commodities kept climbing. There probably was quite a bit of speculative money or money that sought safe haven away from the banks. However, China did not completely slam on the brakes till recently. And, had China not been slowing down it’s manufacturing all year, where would commodity prices be even without the speculative money? Would oil be at $150, and in that scenario NOT be due to speculation? Meaning, where should we expect commodities to rebound to once China goes full steam again?

Also, for those hoping China slowed down because the U.S. and Europe have slowed to a crawl, I beg you to do more research and think again. My dad and his business partners are having trouble placing their orders at factories in China because domestic demand is too strong. Factories are actually turning down orders for exports, the very exports that catapulted China’s economy to the fastest growing. If I had to place a wager, I’d bet China’s recent weakness is self-imposed for the Olympics, and not because it’s being dragged down by U.S. slowdown. Again, we Americans always thinking we’re the center of the world, and the rest of the world depends on us. This is a very dangerous tunnel vision and, as Mitt Romney said, will turn us into a second rate country like France in no time.

My dad is currently visiting factories in China, saying his factories have been required to set aside roughly ~20% of steel for China’s domestic use (so he can’t get his products made as they’re exported here to the U.S.) This restriction is because steel mills have been shut down to clear the air for the Olympics. Also, he says China is fixing steel prices 20% - 35% below market prices specifically for the earthquake rebuild. This is to ensure steel availability to the damaged areas.

This corresponds with the following reports from Capital Link Shipping’s Imarex report (yes, shipping research websites are great even if you’re not rolling the dice on a DryShips):

Steel mills affected by the Olympics have finally begun suspending production to ensure clean air in Beijing. Domestic Chinese steel consumption, although very strong, is also expected to come down a bit due to a normal summer lull in consumption. In addition, production costs (iron ore, coking coal, credit issues) and coke shortages are making it harder for small steel mills to keep up production. ~http://files.irwebpage.com/reports/shipping/08l26Pvi9u/ImarexJuly22.pdf

And on the July 25h report:

All eyes are on China / Olympics. The skies in Beijing are still smoggy as hell, expectations point to a slowdown in industrial production, but no indication yet of any significant reduction in iron ore imports. The Chinese are good at always keeping us guessing. One important thing to point out: even if shortterm sentiment is a bit iffy, medium-term sentiment is really good considering the period activity we’ve been seeing. Interesting side note: for the most part, there’s a general consensus that dry bulk rates will trend sideways / fall for the Olympics, then rebounded significantly in the fourth quarter and approach record freight levels by the end of the year. ~http://files.irwebpage.com/reports/shipping/08l26Pvi9u/ImarexJuly25.pdf

Be careful out there. And remember, don’t assume what seems the most logical, or what you want to believe, to be reality. The biggest risk is not knowing, so do your research.

Referenced SuckingLess.com Research Tool:

• Capital Link Shipping: Daily Rates, Industry Reports, and Everything Shipping
• Official China Trade Statistics by Ministry of Commerce of the People’s Republic of China

** Disclosure: no positions in the stocks mentioned **

After first reading this headline this morning: Philip Morris second-quarter profit rises

This headline became amusing: Pfizer profit doubles, but anti-smoking drug lags

I guess all the laid-off people are depressed and smoking more, and don’t need anti-smoking drugs to recover for a job…because there are none.

**Disclosure: Long PM**