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Will Illinois Tool (ITW) Disappoint This Earnings Season?

Zacks Equity Research

Illinois Tool Works Inc. ITW is scheduled to release third-quarter 2019 results on Oct 25, before market open.

This industrial products and equipment manufacturer reported better-than-expected results in each of the trailing four quarters. Average earnings surprise was a positive 0.79%. In the second quarter, the company’s earnings of $2.00 surpassed the Zacks Consensus Estimate of $1.97.

In the past three months, the stock has gained 1.8% against the industry’s decline of 3.4%.

Key Factors

Recent slowdown in manufacturing activities and weak hiring in the manufacturing industry might have adversely impacted Illinois Tool. For instance, manufacturing production in September recorded decline of 0.5% and 0.4% drop in July, primarily due to prolonged weakness in the automotive market. As Illinois Tool has considerable operational presence in the global automotive market, this is likely to have hurt Automotive OEM segment’s revenues in the third quarter. In addition, global uncertainties and trade tension between the United States and China might have affected its top-line performance.

Also, Illinois Tool’s results are likely to reflect a number of company-specific matters. Soft demand environment for equipment and consumables products might have hurt the company’s Welding segment. Also, soft demand in Australia-New Zealand region might have affected Construction Products segment. However, the company is expected to have benefited from strong Food Equipment segment owing to strength across service business.

Increasing liabilities pose a persistent concern for Illinois Tool. At the end of second-quarter 2019, the company’s long-term debt was $7,809 million, up 29.5% from 2018 end. Its profitability is expected to have been impacted by high-debt levels in the to-be-reported quarter as well.

Further, given Illinois Tool’s diverse geographic presence, its operations are subject to economic, social and environmental risks. In the second quarter, forex woes and charges related to restructuring activities had an adverse impact of 6 cents and 2 cents, respectively, on the company’s earnings. A stronger U.S. dollar might have hurt its overseas business in the third quarter as well.

Amid this backdrop, the Zacks Consensus Estimate for third-quarter revenues of Automotive OEM segment is pegged at $748 million, indicating a decline of 4.2% from the year-ago reported number, while that for Specialty Products is $458 million, implying a decline of 3.6%. The consensus mark for Test & Measurement and Electronics segment’s revenues stands at $535 million, almost flat year over year. The consensus estimate for Polymers & Fluids segments’ third-quarter revenues is pegged at $404 million, down 3.7% from the year-ago reported figure while the same for Welding segment is $406 million, implying a decline of 1.9%. The consensus estimate for Food Equipment segments’ revenues is pegged at $572 million, up 0.8%, while that for Construction Products is pegged at $420 million, implying a decline of 2.6%.

Earnings Whispers

According to our quantitative model a stock needs to have the combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy), or at least 3 (Hold) to increase the odds of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

But that is not the case here as we will see below.

Earnings ESP: Illinois Tool has an Earnings ESP of -0.79% as the Most Accurate Estimate is pegged at $1.93, lower than the Zacks Consensus Estimate of $1.94.

Illinois Tool Works Inc. Price and EPS Surprise

Illinois Tool Works Inc. Price and EPS Surprise

Illinois Tool Works Inc. price-eps-surprise | Illinois Tool Works Inc. Quote

Zacks Rank: Illinois Tool carries a Zacks Rank #4 (Sell).

Key Picks

Here are some companies you may want to consider as our model shows that these have the right mix of elements to beat estimates this earnings season:

Plug Power, Inc. PLUG has an Earnings ESP of +58.33% and a Zacks Rank of 1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Zebra Technologies Corporation ZBRA has an Earnings ESP of +2.23% and a Zacks Rank of 3.

Sealed Air Corporation SEE has an Earnings ESP of +2.40% and a Zacks Rank #3.

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