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ITT (ITT) Down 0.5% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research

It has been about a month since the last earnings report for ITT (ITT). Shares have lost about 0.5% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is ITT 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.

ITT Tops Q4 Earnings Estimates, Makes Multiple Announcements

ITT kept its earnings streak alive in the fourth quarter of 2018, pulling off a positive earnings surprise of 10.81%. In addition to the results and solid guidance, this conglomerate impressed the market with announcements of a 10% hike in the quarterly dividend rate, $25-million share buyback program and agreement to acquire Rheinhutte Pumpen Group.

It is worth noting here that the company’s share price increased roughly 4.1% on Feb 22, ending the trading session at $58.64.

Inside the Headlines

The company’s adjusted earnings in the reported quarter were 82 cents per share, surpassing the Zacks Consensus Estimate of 74 cents. Further, the bottom line increased 28.1% from the year-ago tally of 64 cents on the back of improved margins, decline in net interest and other expenses, and lower income tax expenses.

For 2018, the company’s adjusted earnings were $3.23 per share, increasing 24.7% from the year-ago figure of $2.59.

Revenues Fall Y/Y

In the quarter under review, ITT’s sales were $678.4 million, reflecting a year-over-year decline of 0.8%. Organic revenues in the quarter grew 1.4% year over year on the back of strengthening industrial and transportation markets, partially offset by weakness in oil & gas, and other markets. Unfavorable movements in foreign currencies had a negative impact of $14.7 million on revenues.

Also, the top line lagged the Zacks Consensus Estimate of $698 million by 2.74%.

Orders in the reported quarter increased 0.4% year over year to $666.8. Organically, orders grew 2.4%.

The company reports net sales under three segments. A brief discussion on those segments is provided below:

Revenues from the Motion Technologies were $291.3 million, decreasing 2.4% year over year. Organic sales increased 1%, partially offset by 3% impact of forex woes. Orders decreased 5% year over year to $283.9 million.

Revenues from the Industrial Process totaled $229.1 million, decreasing 1.5% year over year. Forex woes had 2% adverse impact and organic sales were flat in the quarter under review. Orders increased 9.6% to $212.9 million in the quarter under review.

Revenues from the Connect & Control Technologies were $158.6 million, increasing 3.5% year over year. Orders of $170.5 million decreased 0.5% year over year.

For 2018, the company’s sales totaled $2,745.1 million, increasing 6.2% year over year.

Margins Improve

In the quarter under review, ITT’s cost of sales decreased 1.6% year over year to $467.9 million. It represented 69% of sales compared with 69.6% in the year-ago quarter. Gross margin increased 60 basis points (bps) year over year to 31%. Operating expenses (including general and administrative, sales and marketing, and research and development expenses) increased 1.5% year over year to $126.7 million.

Total segmental adjusted operating income in the quarter under review increased 10.5% year over year to $95.6 million. Moreover, adjusted operating margin grew 140 bps to 14.1%. Net interest and non-operating expenses in the quarter increased 35.3% year over year to $2.3 million.

Income tax expenses in the quarter were $15.3 million versus $134.3 million recorded in the year-ago comparable quarter.

Balance Sheet and Cash Flow

Exiting the fourth quarter, ITT had cash and cash equivalents of $561.2 million, up 6.7% from $525.8 million at the end of the last reported quarter. Total non-current liabilities decreased 0.8% sequentially to $1,149.8 million.

In 2018, the company generated net cash of $371.8 million from operating activities, surging roughly 50.4% from $247.2 million generated in 2017. Capital expenditure totaled $95.5 million, decreasing 15.7% from $113.3 million spent in the previous year. Adjusted free cash flow in the year was $308.9 million, up 34.1% year over year.

During the year, the company used $47.3 million for distributing dividends and $56.1 million for repurchasing common shares.

Dividend Hike & Acquisition

Concurrent with the earnings release, ITT announced that its board of directors approved a 10% or 1.30 cents per share hike in the quarterly dividend rate, which now moved from 13.4 cents to 14.7 cents. On an annualized basis, the dividend increased to 58.8 cents per share from 53.6 cents. ITT will pay the revised dividend on Apr 1, 2019, to shareholders of record as of Mar 11.

Also, the company has authorized a $25-million share buyback program. This new program, along with a $25-million program announced in November 2018, brings the total buyback authorization to $50 million.

In addition to this, the company announced that it agreed to acquire Germany-based Rheinhutte Pumpen Group for $91.5 million (to be paid in cash and borrowings under revolving credit facility). The other party to the transaction is Aliaxis Group S.A. Rheinhutte Pumpen specializes in manufacturing flow pumps (axial and centrifugal).

The acquired assets — to be integrated with ITT’s Industrial Process segment — will strengthen the company’s business opportunities in Europe. Earnings accretion is anticipated in the initial year of the completion of the buyout, which is expected in the second quarter of 2019.

Outlook

For 2019, ITT anticipates adjusted earnings per share of $3.42-$3.66, up 10% year over year. The bottom line will likely gain from operational execution, expanding market shares, and fall in functional corporate costs. However, unfavorable movements in foreign currencies and high tax rate (22.5% in 2019 versus 20.8% in 2018) will play spoilsport.

Revenues are anticipated to increase 2-4%, with organic sales expanding 3-5%.

Adjusted segmental operating margin is predicted to be 15.7-16.3% versus 15.1% recorded in 2018. The company perceives that favorable impacts of volume, mix, price and others will boost margin by 90-150 bps. Also, net operating productivity will add 50 bps and investments will adversely impact margins by 80 bps.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month. The consensus estimate has shifted -5.37% due to these changes.

VGM Scores

Currently, ITT has a great Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. Following the exact same course, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. 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, ITT has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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