A month has gone by since the last earnings report for Illinois Tool Works (ITW). Shares have lost about 0.7% 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 drivers.
Illinois Tool Q2 Earnings Beat, Revenues Miss Mark
Illinois Tool reported second-quarter 2023 adjusted earnings (excluding 7 cents from non-recurring items) of $2.41 per share, which surpassed the Zacks Consensus Estimate of $2.39. Earnings increased year over year.
Illinois Tool’s revenues of $4,074 million missed the Zacks Consensus Estimate of $4,132.4 million. The top line inched up 1.6% year over year due to a 2% increase in organic sales. Foreign currency headwinds and divestitures had an adverse impact of 1.4%.
Test & Measurement and Electronics’ revenues inched up 0.7% year over year to $700 million. Our estimate for segmental revenues was $715.5 million. Revenues from Automotive OEM (Original Equipment Manufacturer) increased 16.2% to $826 million. Our estimate for segmental revenues was $733.1 million.
Amid a general softness across end markets, we anticipated muted growth for the segment. Food Equipment generated revenues of $654 million, increasing 6.3% year over year. Our estimate for segmental revenues was $628.6 million. Welding revenues were $490 million, up 0.7% year over year. Our estimate for segmental revenues was $499.4 million.
Construction Products’ revenues were down 6.8% to $526 million. Revenues of $423 million from Specialty Products reflected a decrease of 5.4%. Our estimate for segmental revenues was $448.8 million. Polymers & Fluids’ revenues of $459 million declined 7.6% year over year.
In the reported quarter, Illinois Tool’s cost of sales dipped 2% year over year to $2,344 million. Selling, administrative, and research and development expenses increased 4.7% to $690 million. The operating margin was 24.8% in the quarter, up 170 basis points (bps) year over year. Enterprise initiatives contributed 130 bps to the operating margin.
Balance Sheet and Cash Flow
At the end of the second quarter, Illinois Tool had cash and equivalents of $922 million compared with $708 million at the end of December 2022. Long-term debt was $6,947 million compared with $6,173 million at the end of December 2022.
In the first half of 2023, Illinois Tool generated net cash of $1,518 million from operating activities, reflecting a surge of 84.2% from the year-ago reported number. Capital spending on the purchase of plant and equipment was $198 million, up 27.7% year over year. Free cash flow of $1,320 million surged 97.3% year over year.
2023 EPS Guidance Raised
Anticipating stable underlying demand for the rest of 2023, Illinois Tool has raised its earnings guidance for 2023. The company now expects earnings of $9.55-$9.95 per share for the current year compared with $9.45-$9.85 anticipated earlier.
Anticipating steady demand levels, ITW expects organic growth to increase 3-5%. The company expects total revenues to increase 2-4% from the year-ago reported figure. This includes 1% negative impact from divestitures. Operating margin is expected to be 24.5-25.5% for the year. Enterprise initiatives are expected to contribute more than 100 basis points to operating margin.
Illinois Tool projects free cash flow to be more than 100% of net income in 2023. The company expects to repurchase about $1.5 billion worth of shares in the year. Tax rate is expected to be 22.5-23.5%.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in estimates review.
Currently, Illinois Tool Works has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. Following the exact same course, 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.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions has been net zero. Notably, Illinois Tool Works has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
Performance of an Industry Player
Illinois Tool Works is part of the Zacks Manufacturing - General Industrial industry. Over the past month, Dover Corporation (DOV), a stock from the same industry, has gained 3.7%. The company reported its results for the quarter ended June 2023 more than a month ago.
Dover Corporation reported revenues of $2.1 billion in the last reported quarter, representing a year-over-year change of -2.7%. EPS of $2.05 for the same period compares with $2.14 a year ago.
Dover Corporation is expected to post earnings of $2.34 per share for the current quarter, representing a year-over-year change of +3.5%. Over the last 30 days, the Zacks Consensus Estimate has changed -0.4%.
Dover Corporation has a Zacks Rank #3 (Hold) based on the overall direction and magnitude of estimate revisions. Additionally, the stock has a VGM Score of D.
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