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What's in the Offing for Illinois Tool (ITW) in Q3 Earnings?

Zacks Equity Research
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What's in the Offing for Illinois Tool (ITW) in Q3 Earnings?

Illinois Tool's (ITW) third-quarter 2018 earnings to gain from diversified business and enterprise strategy.

Illinois Tool Works Inc. ITW is scheduled to release third-quarter 2018 results on Oct 24, before the market opens.

This industrial products and equipment manufacturer delivered better-than-expected results in three of the last four quarters, while lagged estimates once. Average earnings surprise was a positive 2.69%. Notably, in the last reported quarter, the company’s earnings of $1.97 lagged the Zacks Consensus Estimate of $1.98.

Let us see how things are shaping up for Illinois Tool Works this quarter.

Factors to Affect Q3 Results

Operating environment currently seems to be favorable for industrial product manufacturers and service providers in the United States. Among many, rising industrial production in the country as well as healthy demand for U.S.-manufactured machinery will prove advantageous for industrial products manufacturers. In addition to these, changes in tax policies, increasing housing starts, availability of higher-wage jobs and infrastructural developments will be boons. Further, use of technologically advanced machinery and equipment in manufacturing processes generally keeps demand strong for industrial products.

We believe that Illinois Tool Works is poised to gain from a well-diversified business structure, Enterprise Strategy and impressive capital-allocation policy. Moreover, investments made for research and development of products will help in keeping the company’s product offering at par with evolving customer demand. For third-quarter 2018, the company anticipates earnings per share of $1.80-$1.90. Organic sales are predicted to grow 3-4% while total revenues are anticipated to grow 2-3%.

The Automotive OEM segment performed well organically, registered sales growth of 1.9% in the first half of 2018. Sales improved in a low-single digit in the Asia Pacific, North America and Europe while gained in double digits in China. Further, improvements are anticipated for the segment, with organic sales growth of 3% in the second half of 2018. The Zacks Consensus Estimate for the Automotive OEM segment’s revenues stands at $811 million for the third quarter, above $795 million generated in the year-ago quarter. Also, the segment’s average sales surprise for the last four quarters was a positive 0.76%.Organic sales of the Food Equipment segment have increased 1.1% in the first half of 2018. Further, improvements in the segment’s organic sales are anticipated for the second half. Strengthening demand from institutions might be major growth driver. The Zacks Consensus Estimate for the segment’s revenues stands at $565 million for the third quarter, above $549 million generated in the year-ago quarter.

However, we remain cautious of adverse impacts of unfavorable movements in foreign currencies, predicted to adversely impact earnings in the second half by 12 cents. On the other hand, raw material cost inflation on a dollar basis will be offset by pricing actions but will have adverse impact on margins. Tariffs, accounting for just 10-15% of cost inflation estimated for 2018, will have minimal impact as the company follows “produce where we sell” strategy.

Also, the company generates a substantial portion of its revenues from international operations. Although international businesses provide geographical diversity, they expose the company to risks arising from geopolitical issues. Further, weakness in cash position and high debt levels can be concerning for the company.

Earnings Whispers

Our proven model does not conclusively show an earnings beat for Illinois Tool Works in the to-be-reported quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. But that is not the case here as you will see below.

Earnings ESP: Illinois Tool Works has an Earnings ESP of -0.13%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Illinois Tool Works Inc. Price and EPS Surprise


Illinois Tool Works Inc. Price and EPS Surprise | Illinois Tool Works Inc. Quote


Zacks Rank: Illinois Tool Works carries a Zacks Rank #3, which increases the predictive power of the ESP. However, the company’s negative ESP makes surprise prediction difficult.

We caution against Sell-rated stocks (Zacks Rank #4 or 5) going into an earnings announcement, especially when the company is seeing negative estimate revisions.

Key Picks

Here are some companies that you may want to consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:

Flowserve Corporation FLS has an Earnings ESP of +1.72% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Middleby Corporation MIDD has an Earnings ESP of +0.64% and a Zacks Rank #2.

Nordson Corporation NDSN has an Earnings ESP of +1.11% and a Zacks Rank #3.

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Nordson Corporation (NDSN) : Free Stock Analysis Report
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