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Illinois Tool Works (ITW) Up 10.2% Since Last Earnings Report: Can It Continue?

It has been about a month since the last earnings report for Illinois Tool Works (ITW). Shares have added about 10.2% 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 the most recent earnings report in order to get a better handle on the important catalysts.

Illinois Tool Works Q3 Earnings & Revenues Top Estimates

Illinois Tool reported better-than-expected third-quarter 2022 results. Its earnings surpassed estimates by 4.4%, while sales beat the same by 2.1%.

The industrial tool maker’s adjusted earnings (excluding a 13-cent impact of unfavorable foreign currency translation) in the quarter were $2.35, surpassing the Zacks Consensus Estimate of $2.25. Earnings increased 16.3% from the year-ago figure of $2.02.

Revenue Details

Illinois Tool generated revenues of $4,011 million in the reported quarter, reflecting growth of 12.8% from the year-ago figure. The top-line results benefited from a 16% increase in organic sales and a 3% contribution from the MTS acquisition. Foreign currency movements had an adverse impact of 6%.

Except for the Specialty Products segment, the increase in sales in other segments supported the quarterly sales rise of 12.8%.

The top line surpassed the Zacks Consensus Estimate of $3,930 million.

Illinois Tool reports revenues under the segments discussed below:

Test & Measurement and Electronics’ revenues in the third quarter increased 29% year over year to $715 million. Revenues from Automotive OEM (Original Equipment Manufacturer) increased 16% to $753 million. Food Equipment generated revenues of $633 million, increasing 16% year over year.

Welding revenues were $477 million, growing 12% year over year. Construction Products’ revenues were up 10% to $527 million. Revenues of $438 million from Specialty Products reflected a decrease of 5%. Polymers & Fluids’ revenues of $473 million grew 4% year over year.

Margin Profile

In the reported quarter, Illinois Tool’s cost of sales increased 13.1% year over year to $2,371 million. It represented 59.1% of the quarter’s revenues compared with 58.9% in the year-ago quarter. Selling, administrative, as well as research and development expenses expanded 7.4% to $624 million. The same represented 15.6% of third-quarter revenues compared with 16.3% in the year-ago quarter.

The operating margin was 24.5% in the quarter, up 70 basis points (bps) year over year. Enterprise initiatives contributed 110 bps to the operating margin, while price/cost had an adverse impact of 40 bps. Interest expenses in the quarter increased 6.1% year over year to $52 million. The effective tax rate in the quarter was 23.9%.

Balance Sheet and Cash Flow

At the time of exiting the third quarter, Illinois Tool had cash and cash equivalents of $774 million, down 49.3% from $1,527 million recorded at the end of the fourth quarter of 2021. Long-term debt decreased 14% to $5,940 million.

In the first nine months of 2022, Illinois Tool generated net cash of $1,537 million from operating activities, reflecting a decline of 13.8% from the year-ago period’s number. Capital spending on the purchase of plant and equipment was $256 million, up 18% year over year. Free cash flow was $1,281 million, reflecting a year-over-year decline of 18.2%.

Outlook

For 2022, Illinois Tool expects organic revenue growth of 11-12% compared with 7-10% projected earlier and a 9-10% rise in total revenues compared with the earlier projected 6-9%, from the respective year-ago actuals. GAAP EPS for the year is anticipated to be $9.45-$9.55 (updated for incremental foreign currency translation headwind and an estimated fourth quarter divestiture gain of $0.45), compared with $9.00-$9.10 expected earlier.

Foreign currency translation is expected to adversely impact sales by 5%, while the MTS acquisition is likely to boost the top line by 3%.

The operating margin is expected to be approximately 24%. Enterprise initiatives are likely to contribute 100 bps to the operating margin. However, dilution from price/costs and MTS buyouts is predicted to lower the margin by 100 bps, each. The free cash flow conversion rate is expected to be 80% of net income.

For the fourth quarter, the company anticipates organic growth of approximately 10%. EPS growth is anticipated to be approximately 40%. Operating margin is anticipated to improve more than 100 bps and price/cost is anticipated to be accretive to income and margin.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates revision.

The consensus estimate has shifted 13.42% due to these changes.

VGM Scores

At this time, Illinois Tool Works has an average Growth Score of C, however its Momentum Score is doing a bit better with a B. However, 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 D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Illinois Tool Works has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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