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On Aug 22, we maintained our Neutral recommendation on ITT Corp. (ITT - Analyst Report). We appreciate the company’s better-than-expected earnings performance in the second quarter of 2013.

Moreover, the company is expected to benefit from the growth in the oil and gas, chemical and industrial markets, share gains in the global automotive market, the impact of the Bornemann Pumps acquisition and emerging market growth. However, this favorable growth is expected to be partially offset by weakness in the mining and defense end markets.

Why the Reiteration?

On Aug 1, ITT reported second-quarter 2013 earnings per share of 51 cents, which improved 15% year over year and outpaced the Zacks Consensus Estimate of 45 cents by 11.8%. Earnings were up 15% year over year. Profits during the quarter were driven by stronger operational performance, improved volumes and a favorable mix.

Total revenue in the quarter surged 9.2% to $609.2 million from $557.9 million in the prior-year period. Organic revenue for the quarter grew 2%. Revenue growth during the quarter was driven by a 13% increase in Western Europe and a 12% increase in emerging markets. In addition, gains in key global end-markets with 19% growth in energy and 12% growth in the global automotive breakpad market coupled with a solid performance from the recently-acquired Bornemann Pumps business contributed to the top-line growth. These were somewhat offset by a 35% decline in global mining. 

Following the release of the second-quarter results, the Zacks Consensus Estimate for fiscal 2013 increased 2.6% to $1.94 per share. Moreover, the Zacks Consensus Estimate for fiscal 2014 rose 2.3% to $2.24 per share.

The emerging markets have been a major revenue driver for the company. This region represents approximately 30% of the total consolidated revenue for the company. ITT has reported significant growth in automotive in China, chemical in the Middle East and mining in Latin America, among others. In addition, the aftermarket solutions are also very profitable for ITT. The company has been working on the expansion of its aftermarket service and in fiscal 2012 it contributed about 30% to the top line.

However, the pump and valve markets of the Industrial Process segment are highly competitive. Price, delivery times and on-time delivery performance, brand recognition and reputation, perceived quality, breadth of product offerings, commercial terms, technical support, and localization are primarily the driving factors behind consumers’ purchasing decision. Pricing is typically very competitive for large projects because of the increased potential of aftermarket opportunities for the original equipment providers.

Other Stocks to Look For

Currently, ITT retains a Zacks Rank #2 (Buy).

Some other stocks that are performing well in the industry where ITT operates include Michael Baker Corp. , VSE Corp. (VSEC - Snapshot Report) and AO Smith Corp. (AOS - Snapshot Report). Michael Baker carries a Zacks Rank #1 (Strong Buy), while VSE and AO Smith carry a Zacks Rank #2 (Buy).

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