Illinois Tool's (ITW) Prospects Bleak on Pandemic Qualms

Illinois Tool Works Inc. ITW seems to have lost its sheen to the adverse impacts of the coronavirus outbreak. Also, high leverage and forex woes are concerning for the company. Notably, weak price performance and lowered earnings estimates indicate bearish sentiments for the stock.

The company has a market capitalization of $54.5 billion and a Zacks Rank #4 (Sell) at present. It belongs to the Zacks Manufacturing – General Industrial industry, which, in turn, comes under the ambit of the Zacks Industrial Products sector. The industry currently carries a Zacks Industry Rank #200, which places it in the bottom 21% of more than 250 Zacks industries.

We believe that the industry is suffering from uncertainties due to the pandemic, unfavorable movements in foreign currencies, the softness in industrial production in the United States and strained trade relations due to tariffs.

Notably, Illinois Tool’s earnings surpassed estimates by 3.5% in first-quarter 2020. However, sales lagged estimates by 3.2% and declined 9.1% year over year.

Year to date, the company’s shares have fallen 4.7% compared with the industry’s decline of 15.8%.

Factors Affecting Investment Appeal

Pandemic-Related Headwinds: Illinois Tool’s results in first-quarter 2020 were adversely impacted by the coronavirus outbreak. Its organic sales in the quarter declined 6.6% year over year. On a segmental basis, revenues of all seven segments were down from the year-ago quarter, with the biggest fall of 13.7% recorded for the Automotive OEM (Original Equipment Manufacturer) segment.

The company expects the pandemic-related uncertainties to continue impacting its operations in 2020. Financial projections for the year as well as share-buyback activities have been suspended for now. Further, the company predicts sales to fall 30-40% year over year in the second quarter. A sharp fall of 60-70% is expected for the Automotive OEM segment. It is noteworthy here that the company’s solid product offerings and diversified business might benefit.

The Zacks Consensus Estimate for revenues in the second quarter of 2020 is pegged at $2.34 billion, reflecting a year-over-year decline of 35.3% from the year-ago reported figure. Also, the estimate for 2020 at $11.3 billion suggests a decline of 20% from the previous year’s reported figure.

Leverage: High debts increase financial obligations and, in turn, hurt profitability. Illinois Tool’s long-term debts were $7,690 million at the end of first-quarter 2020, while its cash and cash equivalents were just $1,430 million. Interest expenses in the quarter totaled $51 million.

The company’s total debt to total capital was 77.1%, higher than the industry’s 50.2% and the previous quarter’s 71.9%. Also, total debt to total equity at 336.9% was way above 256% at the end of fourth-quarter 2019 and the industry’s 83.9%.

Woes Related to International Presence: The company is exposed to risks — including geopolitical issues, unfavorable movements in foreign currencies and others — arising from international operations.

In first-quarter 2020, its organic sales in China declined 24% year over year and that in North America was down 5%. Also, organic sales in Europe decreased 7%. Forex woes adversely impacted sales by 1.5% in the first quarter.

Bottom-Line Estimate Trend: The Zacks Consensus Estimate for Illinois Tool’s earnings has moved downward in the past 60 days. The consensus estimate for earnings is currently pegged at 67 cents for second-quarter 2020 and $1.18 for the third quarter, reflecting declines of 55.9% and 28.9% from the 60-day-ago figures.

Further, the consensus estimate at $5.24 per share for 2020 reflects a decline of 22.3%, while the same is pegged at $6.63 for 2021, suggesting a fall of 10.2% from the 60-day-ago numbers. Notably, there were ten down revisions for 2020 and six for 2021.

Illinois Tool Works Inc. Price and Consensus

 

Illinois Tool Works Inc. Price and Consensus

Illinois Tool Works Inc. price-consensus-chart | Illinois Tool Works Inc. Quote

Stocks to Consider

Some better-ranked stocks in the sector are Silgan Holdings Inc. SLGN, Broadwind Energy, Inc. BWEN and Graphic Packaging Holding Company GPK. While Silgan currently sports a Zacks Rank #1 (Strong Buy), both Broadwind Energy and Graphic Packaging carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

In the past 60 days, earnings estimates for Silgan Holdings and Graphic Packaging improved for the current year, while have been unchanged for Broadwind Energy. Further, earnings surprise for the last reported quarter was 16.33% for Silgan Holdings, 200% for Broadwind Energy and 24% for Graphic Packaging.

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