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Illinois Tool Works (ITW) Down 3.3% Since Last Earnings Report: Can It Rebound?

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A month has gone by since the last earnings report for Illinois Tool Works (ITW - Free Report) . Shares have lost about 3.3% in that time frame, outperforming 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 Works Q1 Earnings and Revenues Top Estimates

Illinois Tool Works Inc. reported better-than-expected first-quarter 2022 results. Its earnings surpassed estimates by 1.9% while sales beat the same by 4.6%.

The industrial tool maker’s adjusted earnings (excluding a 5-cent impact of unfavorable foreign currency translation) in the quarter were $2.11, surpassing the Zacks Consensus Estimate of $2.07. Earnings were flat with the year-ago figure.

Revenue Details

Illinois Tool generated revenues of $3,939 million in the reported quarter, reflecting growth of 11.2% from the year-ago figure. The top-line results benefited from a 10.6% increase in organic sales and a 2.8% contribution from the MTS acquisition. Foreign currency movements had an adverse impact of 2.2%.

Except for the Automotive OEM and Specialty Products segments, sales increase in other segments supported the quarterly sales rise of 11.2%. Supply-chain restrictions had adverse impacts on auto production and hence, affected Automotive OEM in the quarter.

The top line surpassed the Zacks Consensus Estimate of $3,767 million.

Illinois Tool reports revenues under the segments discussed below:

Test & Measurement and Electronics’ revenues in the first quarter increased 8% year over year to $685 million. Revenues from Automotive OEM (Original Equipment Manufacturer) declined 3% to $760 million. Food Equipment generated revenues of $ 566 million, increasing 25% year over year.

Welding revenues were $450 million, growing 12% year over year. Construction Products’ revenues were up 17% to $551 million. Revenues of $452 million from Specialty Products decreased 1%. Polymers & Fluids’ revenues of $481 million grew 11% year over year.

Margin Profile

In the reported quarter, Illinois Tool’s cost of sales increased 15.6% year over year to $2,357 million. It represented 59.8% of the quarter’s revenues compared with 57.5% in the year-ago quarter. Selling, administrative, and research and development expenses expanded 15.2% to $652 million. The same represented 16.6% of first-quarter revenues compared with 16% in the year-ago quarter.

The operating margin was 22.7% in the quarter, down 280 basis points (bps) year over year. Enterprise initiatives contributed 90 bps to the operating margin, while price/cost had an adverse impact of 250 bps. Interest expenses in the quarter decreased 7.7% year over year to $48 million. The effective tax rate in the quarter was 23.1%.

Balance Sheet and Cash Flow

Exiting the first quarter, Illinois Tool had cash and cash equivalents of $1,296 million, down 15.1% from $1,527 million recorded at the end of the last reported quarter. Long-term debt decreased 1.3% sequentially to $6,817 million.

In the first three months of 2022, Illinois Tool generated net cash of $323 million from operating activities, reflecting a decline of 47% from the previous-year quarter’s figure. Capital spending on the purchase of plant and equipment was $74 million, up 8.8% year over year. Free cash flow was $249 million, reflecting a year-over-year decline of 54%.

Outlook

For 2022, Illinois Tool expects organic revenue growth of 7-10% and an 8.5-11.5% rise in total revenues from the respective year-ago actuals.

Foreign currency translation is expected to adversely impact sales by 1.5%, while the MTS acquisition is likely to boost the top line by 3%.

Earnings (GAAP) are expected to be $9.00-$9.40 per share, suggesting an increase of 11-16% (excluding the impact of one-time favorable tax items in 2021) from the previous year’s reported number.

The operating margin is expected to be 24-25%. Enterprise initiatives are likely to contribute 100 bps to the operating margin. However, dilution from price/costs and MTS buyouts are predicted to lower the margin 100 bps and 50 bps, respectively.

In the year, Illinois Tool intends to repurchase $1.5 billion worth of shares. The tax rate (effective) is expected to be 23-24%.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month.

VGM Scores

Currently, Illinois Tool Works has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. 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 C. 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, Illinois Tool Works has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

Performance of an Industry Player

Illinois Tool Works belongs to the Zacks Manufacturing - General Industrial industry. Another stock from the same industry, Barnes Group (B - Free Report) , has gained 4.4% over the past month. More than a month has passed since the company reported results for the quarter ended March 2022.

Barnes Group reported revenues of $312.38 million in the last reported quarter, representing a year-over-year change of +3.6%. EPS of $0.41 for the same period compares with $0.38 a year ago.

For the current quarter, Barnes Group is expected to post earnings of $0.48 per share, indicating a change of +6.7% from the year-ago quarter. The Zacks Consensus Estimate remained unchanged over the last 30 days.

Barnes Group has a Zacks Rank #5 (Strong Sell) based on the overall direction and magnitude of estimate revisions. Additionally, the stock has a VGM Score of C.


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