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Illinois Tool Works (ITW) Down 5.8% Since Last Earnings Report: Can It Rebound?

It has been about a month since the last earnings report for Illinois Tool Works (ITW). Shares have lost about 5.8% in that time frame, underperforming 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 the most recent earnings report in order to get a better handle on the important catalysts.

Illinois Tool Q1 Earnings & Revenues Beat

Illinois Tool reported first-quarter 2023 earnings of $2.33 per share, which surpassed the Zacks Consensus Estimate of $2.18. Earnings increased 10.4% year over year.

Illinois Tool’s revenues of $4,019 million outperformed the Zacks Consensus Estimate of $3,962.4 million. The top-line results benefited from a 5% increase in organic sales. Foreign currency headwinds and divestitures had an adverse impact of 3%.

Segmental Performance

Test & Measurement and Electronics’ revenues inched up 2.6% year over year to $703 million. Our estimate for segmental revenues was $694.1 million. Revenues from Automotive OEM (Original Equipment Manufacturer) increased 4.7% to $796 million. Our estimate for segmental revenues was $754.4 million. Food Equipment generated revenues of $635 million, increasing 12.3% year over year. Our estimate for segmental revenues was $568.1 million.

Welding revenues were $493 million, growing 9.6% year over year. Our estimate for segmental revenues was $450.8 million. Construction Products’ revenues were down 4.6% to $526 million. Our estimate for segmental revenues was $554.2 million.

Revenues of $423 million from Specialty Products reflected a decrease of 6.4%. Our estimate for segmental revenues was $452.1 million. Polymers & Fluids’ revenues of $447 million declined 7% year over year. Our estimate for segmental revenues was $482.6 million.

Margin Profile

In the reported quarter, Illinois Tool’s cost of sales dipped approximately 1% year over year to $2,341 million. Selling, administrative, and research and development expenses increased 3.5% to $675 million.

The operating margin was 24.2% in the quarter, up 150 basis points (bps) year over year. Enterprise initiatives contributed 100 bps to the operating margin.

Balance Sheet and Cash Flow

At the end of the first quarter, Illinois Tool had cash and equivalents of $1,143 million compared with $708 million at the end of December 2022. Long-term debt was $5,510 million compared with $6,173 million at the end of December 2022.

In the first quarter, Illinois Tool generated net cash of $728 million from operating activities, reflecting a surge of more than 100% from the year-ago reported number. Capital spending on the purchase of plant and equipment was $113 million, up 52.7% year over year. Free cash flow of $615 million surged more than 100% year over year.

2023 Guidance Raised

For 2023, Illinois Tool raised its earnings guidance to $9.45-$9.85 per share compared with $9.40-$9.80 anticipated earlier. The mid-point of the guided range — $9.65 — lies above the Zacks Consensus Estimate of $9.50.

Amid a slowdown in certain end markets, ITW expects muted organic growth of 3-5%. Foreign currency headwinds and divestitures are expected to reduce revenues by 1%. With this, total revenues are expected to increase 2-4% year over year in the current year. Previously, the company expected total revenues to increase 1.5-3.5%.

Illinois Tool anticipates operating margin of 24.5-25.5%, with a contribution of approximately 100 bps from enterprise initiatives. Free cash flow is expected to be more than 100% of net income. The company expects to buyback approximately $1.5 billion worth of shares.

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How Have Estimates Been Moving Since Then?

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

VGM Scores

Currently, Illinois Tool Works has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. Charting a somewhat similar path, 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.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. 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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