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Why Is Illinois Tool Works (ITW) Up 6.5% 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 added about 6.5% in that time frame, underperforming 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 catalysts.

Illinois Tool Beats on Q3 Earnings, Narrows '23 EPS View

Illinois Tool reported third-quarter 2023 adjusted earnings of $2.55 per share, which surpassed the Zacks Consensus Estimate of adjusted earnings of $2.44 per share. Earnings increased 8.5% year over year.

Illinois Tool’s revenues of $4,031 million missed the consensus estimate of $4,079 million. The top line inched up 0.5% year over year due to a 0.2% increase in organic sales. Divestitures reduced revenues by 1.2% while foreign currency translation had a favorable impact of 1.5%.

Segmental Performance

Test & Measurement and Electronics’ revenues were down 2% year over year to $698 million. Our estimate for segmental revenues was $722.3 million. Revenues from Automotive Original Equipment Manufacturer increased 6% to $799 million. Our estimate for segmental revenues was $770.5 million.

Food Equipment generated revenues of $678 million, increasing 7% year over year. Our estimate for segmental revenues was $645.2 million. Welding revenues were $468 million, down 2% year over year. Our estimate for segmental revenues was $477.7 million.

Construction Products’ revenues were down 1% to $522 million. Our estimate for segmental revenues was $534.3 million. Revenues of $414 million from Specialty Products reflected a decrease of 6%. Our estimate for segmental revenues was $438.8 million. Polymers & Fluids’ revenues of $458 million declined 3% year over year. Our estimate for segmental revenues was $483.7 million.

Margin Profile

In the reported quarter, Illinois Tool’s cost of sales dipped 2.2% year over year to $2,319 million. Selling, administrative, and research and development expenses decreased 1.4% to $615 million. The operating margin was 26.5% in the quarter, up 200 basis points (bps) year over year. Enterprise initiatives contributed 140 bps to the operating margin.

Balance Sheet and Cash Flow

At the end of the third quarter, Illinois Tool had cash and equivalents of $990 million compared with $708 million at the end of December 2022. Long-term debt was $6,818 million compared with $6,173 million at the end of December 2022.

In the first nine months of 2023, Illinois Tool generated net cash of $2,500 million from operating activities, reflecting a surge of 62.7% from the year-ago reported number. Capital spending on the purchase of plant and equipment was $324 million, up 26.6% year over year. Free cash flow of $2,176 million surged 69.9% year over year.

2023 EPS Guidance Narrowed

Due to the ongoing automotive industry labor actions, Illinois Tool has narrowed its earnings guidance for 2023. The company now expects earnings of $9.65-$9.85 per share for the current year compared with earnings of $9.55-$9.95 per share anticipated earlier. The midpoint of the guided range — $9.75 — is in line with the Zacks Consensus Estimate.

Due to ongoing automotive industry labor actions, ITW expects organic revenues to increase 2-3%. The company expects total revenues to increase 1-2% from the year-ago reported figure. This includes a 1% negative impact from divestitures and foreign currency translation. Operating margin is expected to be 25-25.5% for the year. Enterprise initiatives are expected to contribute more than 100 basis points to the operating margin.

Illinois Tool projects free cash flow to be more than 100% of net income in 2023. The company expects to repurchase about $1.5 billion worth of shares in the year. The tax rate is expected to be 22.5-23.5%.

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 a nice Growth Score of B, a grade with the same score on the momentum front. However, the stock was allocated a grade of F on the value side, putting it in the bottom 20% quintile 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. It's no surprise Illinois Tool Works has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.

Performance of an Industry Player

Illinois Tool Works is part of the Zacks Manufacturing - General Industrial industry. Over the past month, Crane (CR - Free Report) , a stock from the same industry, has gained 16.7%. The company reported its results for the quarter ended September 2023 more than a month ago.

Crane reported revenues of $530.1 million in the last reported quarter, representing a year-over-year change of


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