Illinois Tool Works (ITW) Down 3.6% 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 3.6% 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 its most recent earnings report in order to get a better handle on the important catalysts.

Illinois Tool Q1 Earnings Top Estimates, Sales Lag

Illinois Tool has delivered better-than-expected results for first-quarter 2019, with positive earnings surprise of 0.6%. However, sales lagged estimates by 2.3%.

This industrial tool maker's earnings in the reported quarter were $1.81 per share, surpassing the Zacks Consensus Estimate of $1.80. On a year-over-year basis, the bottom line declined 4.7% from the year-ago figure of $1.90 due mainly to weak sales as well as adverse impacts of 3 cents from higher tax rates, 6 cents per share of restructuring costs and 7 cents from forex woes.

Revenues Decline Y/Y

Illinois Tool generated revenues of $3,552 million in the reported quarter, reflecting a decline of 5.1% from the year-ago figure. A 3.4% impact of unfavorable foreign currency movement, 0.2% owing to acquisitions/divestitures and 1.5% drop in organic sales affected top-line results. Product Line Simplification ("PLS") initiatives had adverse 0.7% impact on organic sales.

Also, the top line lagged the Zacks Consensus Estimate of $3,636 million.

Illinois Tool reports revenues under the segments discussed below:

Test & Measurement and Electronics' revenues in the first quarter decreased 3.6% year over year to $524 million. Revenues from Automotive OEM (Original Equipment Manufacturer) declined 10.5% to $806 million. Food Equipment generated revenues of $518 million, decreasing 1.7% year over year.

Welding revenues were $427 million, increasing 1% year over year. Construction Products' revenues were down 6.3% to $401 million while revenues of $465 million from Specialty Products reflect a decline of 4.3%. Polymers & Fluids' revenues of $416 million decreased 6% year over year.

Operating Margin Improves

In the reported quarter, Illinois Tool's cost of sales decreased 5.6% year over year to $2,059 million. It represented 58% of the quarter's revenues versus 58.3% in the year-ago quarter. Selling, administrative, and research and development expenses decreased 0.2% year over year to $611 million while were 17.2% of first-quarter revenues versus 16.3% in the year-ago quarter.

Operating margin (excluding restructuring charges) was 24.3%, increasing 20 basis points (bps) year over year. Enterprise initiatives contributed 100 bps to operating margin, offsetting 30 bps of adverse impacts from volume, 10 bps from price/costs and 40 bps from other sources.

Adjusted tax rate in the quarter was 24.8%.

Balance Sheet and Cash Flow

Exiting the first quarter, Illinois Tool had cash and cash equivalents of $1,755 million, up 16.7% from $1,504 million recorded at the end of the last reported quarter. Long-term debt decreased 0.8% sequentially to $5,981 million.

In the first quarter, the company generated net cash of $616 million from operating activities, reflecting growth of 14.5% over the year-ago quarter. Capital spending on the purchase of plant and equipment was $77 million, lower than $94 million used in the year-ago quarter. Free cash flow was $539 million, reflecting year-over-year growth of 21.4%.

During the quarter, the company bought back $375 million worth of common shares and paid dividend totaling $328 million.

Outlook

Illinois Tool noted that its performance in the second half of 2019 will be better than the first half, driven by favorable price/cost impact, enterprise initiatives and restructuring actions. Also, benefits from favorable forex and sales comparisons, and stabilizing Europe and China auto production will be boons.

For 2019, the company maintained the earnings guidance of $7.90-$8.20 per share, reflecting growth of 4-8% year over year.
 
The company anticipates organic revenue growth of 0.5-2.5%, down from previously mentioned 1-3%. The revision reflects weak organic performance in the first quarter. Adverse impact of 80 bps is expected from PLS activities. Total revenues will likely be $14.5-$14.8 billion, down from previously stated $14.8-$15 billion.

The company expects operating margin to increase roughly 100 bps year over year. The results will gain from 100 bps of contributions from enterprise initiatives, favorable pricing conditions and restructuring benefits expected in the second half.

The expected tax rate is roughly 24.5-25.5%. Free cash flow will likely be more than 100% of net income. Share buybacks are anticipated to be roughly $1.5 billion in the year.

How Have Estimates Been Moving Since Then?

Fresh estimates followed a downward path over the past two months.

VGM Scores

Currently, Illinois Tool Works has a nice Growth Score of B, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% 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

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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