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Why Is Illinois Tool Works (ITW) Down 6.6% Since Last Earnings Report?

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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 6.6% in that time frame, underperforming 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 drivers.

Illinois Tool Works Q2 Earnings & Revenues Top Estimates

Illinois Tool Works Inc. reported better-than-expected second-quarter 2022 results. Its earnings surpassed estimates by 7.2%, while sales beat the same by 1%.

The industrial tool maker’s adjusted earnings (excluding a 15-cent impact of unfavorable foreign currency translation) in the quarter were $2.37, surpassing the Zacks Consensus Estimate of $2.21. Earnings increased 12.9% from the year-ago figure of $2.10.

Revenue Details

Illinois Tool generated revenues of $4,011 million in the reported quarter, reflecting growth of 9% from the year-ago figure. The top-line results benefited from a 10% increase in organic sales and a 3% contribution from the MTS acquisition. Foreign currency movements had an adverse impact of 4%.

Except for the Specialty Products segment, sales increase in other segments supported the quarterly sales rise of 9%.

The top line surpassed the Zacks Consensus Estimate of $3,970 million.

Illinois Tool reports revenues under the segments discussed below:

Test & Measurement and Electronics’ revenues in the first quarter increased 14.9% year over year to $696 million. Revenues from Automotive OEM (Original Equipment Manufacturer) increased 0.6% to $711 million. Food Equipment generated revenues of $614 million, increasing 19.6% year over year.

Welding revenues were $486 million, growing 20.8% year over year. Construction Products’ revenues were up 9.1% to $565 million. Revenues of $447 million from Specialty Products reflected a decrease of 5%. Polymers & Fluids’ revenues of $496 million grew 6.7% year over year.

Margin Profile

In the reported quarter, Illinois Tool’s cost of sales increased 10.6% year over year to $2,392 million. It represented 59.6% of the quarter’s revenues compared with 58.8% in the year-ago quarter. Selling, administrative, and research and development expenses expanded 12.1% to $659 million. The same represented 16.6% of second-quarter revenues compared with 16% in the year-ago quarter.

The operating margin was 23.1% in the quarter, down 120 basis points (bps) year over year. Enterprise initiatives contributed 90 bps to the operating margin, while price/cost had an adverse impact of 160 bps. Interest expenses in the quarter decreased 9.6% year over year to $47 million. The effective tax rate in the quarter was 23.9%.

Balance Sheet and Cash Flow

At the time of exiting the second quarter, Illinois Tool had cash and cash equivalents of $879 million, down 42.4% from $1,527 million recorded at the end of the fourth quarter of 2021. Long-term debt decreased 11.5% to $6,115 million.

In the first six months of 2022, Illinois Tool generated net cash of $824 million from operating activities, reflecting a decline of 29.2% from the year-ago period’s number. Capital spending on the purchase of plant and equipment was $155 million, up 6.2% year over year. Free cash flow was $669 million, reflecting a year-over-year decline of 34.3%.

Outlook

For 2022, Illinois Tool expects organic revenue growth of 7-10 from the year-ago actuals.

Foreign currency translation is expected to adversely impact sales by 4% and EPs by 35 cents, while the MTS acquisition is likely to boost the top line by 3%.

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 is predicted to lower the margin 100 bps, each.

Free cash flow conversion rate is expected to be 85-95% of net income. The tax rate (effective) is expected to be 22-23%.

How Have Estimates Been Moving Since Then?

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

VGM Scores

At this time, Illinois Tool Works has an average Growth Score of C, though it is lagging a bit 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 D. 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.


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