It has been about a month since the last earnings report for Illinois Tool Works (ITW). Shares have added about 1.1% in that time frame, underperforming 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 drivers.
Illinois Tool Q3 Earnings Beat Estimates, Decline Y/Y
Illinois Tool has reported impressive results for third-quarter 2020, with earnings surpassing estimates by 26.2%. This was the ninth consecutive quarter of impressive bottom-line results. Also, the quarter’s sales surpassed estimates by 12.1%.
The industrial tool maker’s earnings in the reported quarter were $1.83 per share, surpassing the Zacks Consensus Estimate of $1.45. However, the bottom line declined 10.3% from the year-ago reported number of $2.04 due to weak revenue generation and a fall in the operating margin.
Illinois Tool generated revenues of $3,307 million in the reported quarter, reflecting a decline of 4.9% from the year-ago figure. Top-line results were affected by a 1% decline from divestitures/acquisitions and a 4.6% drop in organic sales. However, movements in foreign currencies positively impacted results by 0.7%.
However, the top line surpassed the Zacks Consensus Estimate of $2,949 million.
On a sequential basis, the quarter’s top line grew 29% as multiple end markets served by the company showed recovery from the downturn caused by the pandemic.
Illinois Tool reports revenues under the segments discussed below:
Test & Measurement and Electronics’ revenues in the third quarter decreased 4.3% year over year to $489 million. Revenues from Automotive OEM (Original Equipment Manufacturer) declined 4.1% to $714 million. Food Equipment generated revenues of $449 million, decreasing 18.6% year over year.
Welding revenues were $346 million, declining 14% year over year. Construction Products’ revenues were up 9.6% to $456 million. Further, revenues of $420 million from Specialty Products reflected a decline of 4.8%. Polymers & Fluids’ revenues of $438 million grew 4.8% year over year.
In the reported quarter, Illinois Tool’s cost of sales declined 4.8% year over year to $1,910 million. Selling, administrative, and research and development expenses declined 1.1% year over year to $560 million. It represented 16.9% of the third quarter’s revenues.
Operating margin was 23.8% in the quarter, down from 25% reported in the year-ago quarter due to lower volumes and a rise in restructuring expenses. However, enterprise initiatives contributed 120 bps to operating margin.
Interest expenses in the quarter were stable at $52 million. Adjusted tax rate in the quarter was 24.1% versus 24.3% in the year-ago quarter.
Balance Sheet and Cash Flow
Exiting the third quarter, Illinois Tool had cash and cash equivalents of $2,169 million, up 19.7% from $1,812 million recorded at the end of the last reported quarter. Long-term debt decreased 2.2% sequentially to $7,592 million.
In the third quarter, the company generated net cash of $683 million from operating activities, reflecting a decline of 25.8% from the year-ago quarter. Capital spending on the purchase of plant and equipment was $52 million, down 42.2% year over year. Free cash flow was $631 million, reflecting a year-over-year decline of 24%.
In the third quarter, the company’s dividend payments amounted to $1.07 per share, higher than $1.00 in the year-ago quarter.
In the quarters ahead, Illinois Tool anticipates benefiting from its diversified businesses, solid product offerings and efficient management team. However, it refrained from reinstating its financial projections for 2020 due to the pandemic-related uncertainties.
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 8.34% due to these changes.
At this time, Illinois Tool Works has an average Growth Score of C, however its Momentum Score is doing a lot better with an A. 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 C. If you aren't focused on one strategy, this score is the one you should be interested in.
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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