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Why Is ITT (ITT) Down 1.6% Since Last Earnings Report?

Zacks Equity Research

It has been about a month since the last earnings report for ITT (ITT). Shares have lost about 1.6% in that time frame, outperforming 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's Q1 Earnings & Revenues Surpass Estimates, Rise Y/Y

ITT pulled off a positive earnings surprise of 8.33% in the first quarter of 2019. Quarterly adjusted earnings came in at 91 cents per share, outpacing the Zacks Consensus Estimate of 84 cents. The bottom line also came in 18.2% higher than the year-ago figure.

Revenues came in at $695.5 million, up 0.9% year over year. The top line also surpassed the consensus estimate by 2.7%. Notably, revenues improved 5% year over year on an organic basis.

Segmental Breakup

First-quarter revenues of the company’s Industrial Process segment were $216 million, up 13.6% year over year. Organic sales jumped 16%, driven by increase in pump projects and strong aftermarket demand in oil and gas, chemical, and industrial markets.

Quarterly revenues of the company’s Motion Technologies segment declined 7.9% year over year to $315 million. Notably, forex woes had 7% adverse impact on sales. Organic sales declined 1% in the quarter, mainly on account of auto OEM weakness, which was partially offset by strength in rail and the auto independent aftermarket.

Connect & Control Technologies segment generated $165 million revenues, up 4.5% year over year. Organic sales increased 6%, driven by rise in aerospace and defense from OEM and aftermarket connectors and components.

Costs/Margins

Cost of sales in the first quarter was $476.7 million, up 2.5% year over year. Gross profit margin was 31.5%, down 100 basis points (bps).

Sales and marketing expenses in the quarter came in at $40.2 million compared with $43.5 million recorded in the year-ago quarter. Adjusted operating margin declined 300 bps to 13%.

Income tax expenses were $19.7 million versus $7.6 million in the year-ago quarter.

Balance Sheet/Cash Flow

Exiting the first quarter, ITT had cash and cash equivalents of $554 million, down from $561.2 million recorded as of Dec 31, 2018.

In the first three months of 2019, the company generated $42.1 million cash from operating activities, lower than $42.4 million recorded in the year-ago period. Capital expenditure totaled $29.2 million, increasing 1.7% from $28.7 million spent in the previous-year quarter. Adjusted free cash flow was $24.6 million, up from $9.7 million recorded during the first three months of 2018.

Outlook

ITT is poised to grow on the back of robust end-market sales and greater operational efficacy. Nonetheless, foreign exchange pressure, escalating compensation costs and material price inflation remain concerns. Based on the existing market conditions, the company has revised its total revenue growth guidance for 2019 from 2-4% to 3-5%. Notably, it continues to anticipate organic revenue growth in the range of 3-5%.Moreover, adjusted earnings view for the year has been revised from $3.42-$3.66 per share to $3.50-$3.66.

How Have Estimates Been Moving Since Then?

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

VGM Scores

Currently, ITT has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. However, the stock was allocated a grade of B on the value side, putting it in the top 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 indicates a downward shift. Notably, ITT has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.



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