Why Is Illinois Tool Works (ITW) Down 5.7% Since Last Earnings Report?

A month has gone by since the last earnings report for Illinois Tool Works (ITW). Shares have lost about 5.7% in that time frame, outperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Illinois Tool Works due for a breakout? 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 drivers.

Illinois Tool Q4 Earnings and Sales Beat Estimates

Illinois Tool delivered better-than-expected results for fourth-quarter 2019 with a positive earnings surprise of 1.62%.

The industrial tool maker’s adjusted earnings in the reported quarter were $1.88 per share, surpassing the Zacks Consensus Estimate of $1.85. The results excluded 11-cents gain from divestitures.

Also, the bottom line increased 2.7% year over year, driven by margin improvement and a 2.6% fall in share count. However, forex woes and higher restructuring charges had an adverse impact of 6 cents.

For 2019, the company’s adjusted earnings (excluding divestitures gains of 9 cents) were $7.65 per share, increasing 0.7% from the year-ago figure. Also, the results surpassed the Zacks Consensus Estimate of $7.61.

Segmental Revenues

Illinois Tool generated revenues of $3,469 million in the reported quarter, reflecting a decline of 3.1% from the year-ago figure. Top-line results were affected by a 1% impact of unfavorable foreign currency movement, 0.5% from divestitures, and a 1.6% drop in organic sales.

Notably, PLS initiatives had an adverse 0.6% impact on organic sales, and General Motors Company strike had a negative impact of 0.5%.

However, the top line surpassed the Zacks Consensus Estimate of $3,447 million by 0.6%.
 
Illinois Tool reports revenues under the segments discussed below:

Test & Measurement and Electronics’ revenues in the fourth quarter increased 2.6% year over year to $552 million. Revenues from Automotive OEM declined 6.7% to $725 million. Food Equipment generated revenues of $571 million, increasing 0.7% year over year.

Welding revenues were $387 million, declining 6.5% year over year. Construction Products’ revenues were down 3.3% to $384 million. Further, revenues of $446 million from Specialty Products reflect a decline of 4.6%. Polymers & Fluids’ revenues of $408 million declined 3.3% year over year.

For 2019, the company’s revenues were $14.1 billion, reflecting a 4.5% decline from the previous year.

Margin Profile

In the reported quarter, Illinois Tool’s cost of sales declined 3.5% year over year to $2,022 million. It represented 58.3% of the quarter’s revenues versus 58.6% in the year-ago quarter. Selling, administrative, and research and development expenses grew 1.4% year over year to $586 million. It represented 16.9% of the fourth quarter’s revenues.

Excluding restructuring charges, operating margin was 24.1%, up 10 basis points (bps) year over year. Enterprise initiatives contributed 130 bps to operating margin and price/costs had a positive impact of 30 bps. Interest expenses in the quarter declined 19% year over year to $51 million.

Balance Sheet and Cash Flow

Exiting the fourth quarter, Illinois Tool had cash and cash equivalents of $1,981 million, up 8.5% from $1,825 million recorded at the end of the last reported quarter. Long-term debt increased 1.5% sequentially to $7,754 million.

In the fourth quarter, the company generated net cash of $774 million from operating activities, reflecting a decline of 4.3% from the year-ago quarter. Capital spending on the purchase of plant and equipment was $82 million, same as the previous-year quarter. Free cash flow was $692 million, reflecting a year-over-year decrease of 4.8%.

In the fourth quarter of 2019, the company bought back $375 million worth of common shares. Moreover, its rewards to shareholders amounted to $2.8 billion in 2019, including share buybacks of $1.5 billion.

Outlook

For 2020, Illinois Tool projects GAAP earnings of $7.65-$8.05 per share.

The company anticipates organic revenues to be flat to up 2% in the year. Forex woes will likely have a 1% adverse impact on revenue growth and divestitures will have similar impacts too. PLS initiatives will likely have an adverse impact of 0.5%.

Total revenues will likely be $13.8-14.1 billion, suggesting a decline of 2% to flat from $14.1 billion reported in 2019.

The company expects operating margin of 24.5-25%. The results will likely gain from roughly 100 bps of contributions from enterprise initiatives. Effective tax rate will likely be 23.5-24.5%.

Free cash flow will likely be more than 100% of net income. The company is likely to buy back shares worth $2 billion in the year.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates review.

VGM Scores

Currently, Illinois Tool Works has a strong Growth Score of A, though it is lagging a bit on the Momentum Score front 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 B. 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 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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