Why Is Illinois Tool Works (ITW) Up 12.4% Since Last Earnings Report?

It has been about a month since the last earnings report for Illinois Tool Works (ITW). Shares have added about 12.4% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Illinois Tool Works due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Illinois Tool Q1 Earnings Beat Estimates, View Weak
 
Illinois Tool delivered better-than-expected results for first-quarter 2020, with an earnings surprise of 3.5%. This was the seventh consecutive quarter of impressive results.

The industrial tool maker’s earnings in the reported quarter were $1.77 per share, surpassing the Zacks Consensus Estimate of $1.71. Also, the bottom line decreased 2.2% from the year-ago reported number of $1.81.

Revenue Details

Illinois Tool generated revenues of $3,228 million in the reported quarter, reflecting a decline of 9.1% from the year-ago figure. Top-line results were affected by a 1.5% impact of unfavorable foreign currency movement, 1% from divestitures/acquisitions, and a 6.6% drop in organic sales.

Also, the top line lagged the Zacks Consensus Estimate of $3,334 million by 3.2%.
 
Illinois Tool reports revenues under the segments discussed below:

Test & Measurement and Electronics’ revenues in the first quarter decreased 7.5% year over year to $485 million. Revenues from Automotive OEM (Original Equipment Manufacturer) declined 13.7% to $696 million. Food Equipment generated revenues of $483 million, decreasing 6.8% year over year.

Welding revenues were $372 million, declining 12.8% year over year. Construction Products’ revenues were down 2.6% to $390 million. Further, revenues of $414 million from Specialty Products reflected a decline of 10.9%. Polymers & Fluids’ revenues of $393 million declined 5.5% year over year.

Margin Profile

In the reported quarter, Illinois Tool’s cost of sales declined 9.1% year over year to $1,871 million. Selling, administrative, and research and development expenses declined 8.3% year over year to $560 million. It represented 17.4% of the first quarter’s revenues.

Operating margin was flat at 23.6%. Enterprise initiatives contributed 120 bps to operating margin, while price/costs and others had positive impacts of 20 bps and 10 bps, respectively. However, volume leverage had a negative impact of 150 bps. Interest expenses in the quarter declined 19% year over year to $51 million.

Balance Sheet and Cash Flow

Exiting the first quarter, Illinois Tool had cash and cash equivalents of $1,430 million, down 27.8% from $1,981 million recorded at the end of the last reported quarter. Long-term debt decreased 0.8% sequentially to $7,690 million.

In the first quarter, the company generated net cash of $614 million from operating activities, reflecting a decline of 0.3% from the year-ago quarter. Capital spending on the purchase of plant and equipment was $60 million, down 22.1% year over year. Free cash flow was $554 million, reflecting a year-over-year increase of 2.8%.

In the first quarter, the company’s dividend payments amounted to $1.07 per share.

Outlook

In the quarters ahead, Illinois Tool anticipates benefiting from its diversified businesses, solid product offerings and healthy liquidity position (including revolving credit facility, $1.4 billion in cash and cash equivalents, and minimal short-term debt).

Due to uncertainties related to the pandemic, the company has suspended its previously issued 2020 projections. Dividend payments remain a priority, while share buybacks have been halted temporarily.

For the second quarter, the company expects a sales decline of 30-40%, with Automotive OEM declining 60-70% year over year. Operating income will likely be $200-$400 million, while free cash flow will probably exceed $500 million.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates review. The consensus estimate has shifted -42.99% due to these changes.

VGM Scores

Currently, Illinois Tool Works has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. Following the exact same course, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Illinois Tool Works has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.

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Illinois Tool Works Inc. (ITW) : Free Stock Analysis Report
 
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