A month has gone by since the last earnings report for Illinois Tool Works (
ITW Quick Quote ITW - Free Report) . Shares have added about 6.6% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Illinois Tool Works due for a pullback? 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 drivers.
Illinois Tool Beats on Q4 Earnings, Gives Solid View
Illinois Tool has reported better-than-expected results for fourth-quarter 2020, with earnings surpassing the Zacks Consensus Estimate of $1.77. This was the tenth consecutive quarter of impressive bottom-line results. Also, the quarter’s sales surpassed estimates of $3.3 billion.
The industrial tool maker’s earnings in the reported quarter were $2.02 per share. Also, the bottom line increased 1.5% from the year-ago reported number of $1.99 on the back of sales generation and operating margin improvement. Adjusted earnings in the quarter were $2.11 per share. For 2020, the company’s earnings were $6.63, below the year-ago figure of $7.74. Revenue Details
Illinois Tool generated revenues of $3,475 million in the reported quarter, reflecting growth of 0.2% from the year-ago figure. Top-line results were affected by a 0.7% decline from divestitures/acquisitions and a 0.9% drop in organic sales. However, movements in foreign currencies positively impacted results by 1.8%.
Illinois Tool reports revenues under the segments discussed below: Test & Measurement and Electronics’ revenues in the fourth quarter decreased 3.3% year over year to $534 million. Revenues from Automotive OEM (Original Equipment Manufacturer) increased 10.4% to $800 million. Food Equipment generated revenues of $471 million, decreasing 17.3% year over year. Welding revenues were $368 million, declining 4.8% year over year. Construction Products’ revenues were up 11.9% to $430 million. Further, revenues of $439 million from Specialty Products reflected a decline of 1.6%. Polymers & Fluids’ revenues of $437 million grew 7% year over year. For 2020, the company’s revenues were $12.6 billion, down from the year-ago figure of $14.1 billion. Margin Profile
In the reported quarter, Illinois Tool’s cost of sales declined 1.8% year over year to $2,000 million. Selling, administrative, and research and development expenses declined 4.9% year over year to $557 million. It represented 16% of fourth-quarter revenues.
Operating margin was 25.4% in the quarter, up from 23.8% reported in the year-ago quarter. Enterprise initiatives contributed 130 bps to operating margin. Interest expenses in the quarter increased 2% year over year to $52 million. Effective tax rate in the quarter was 22.1%. Balance Sheet and Cash Flow
Exiting the fourth quarter, Illinois Tool had cash and cash equivalents of $2,564 million, up 18.2% from $2,169 million recorded at the end of the last reported quarter. Long-term debt increased 2.4% sequentially to $7,772 million.
In the fourth quarter, the company generated net cash of $773 million from operating activities, reflecting a decline of 0.1% from the year-ago quarter. Capital spending on the purchase of plant and equipment was $68 million, down 17.1% year over year. Free cash flow was $705 million, reflecting year-over-year growth of 1.9%. Outlook
For 2021, Illinois Tool anticipates organic revenue growth of 7-10% year over year, with a 9-12% rise in total revenues. Foreign currency translation is expected to positively impact sales by 2%.
Earnings (GAAP) are expected to be $7.60-$8.00 per share, suggesting an increase of 15-21% from the previous year. Free cash is anticipated to be in excess of 100% of net income. How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates.
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 upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Illinois Tool Works has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.