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ITT Corp. (ITT) Q3 Earnings Meet, Stock Hit by Guidance Cut

DHR ITT LUK MIC

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ITT Corp. (ITT - Free Report) posted adjusted earnings of 58 cents per share in third-quarter 2016, in line with the Zacks Consensus Estimate. However, the figure was down 7.9% from the year-ago tally of 63 cents.

The company’s dismal earnings performance as well as downward revision in full-year 2016 guidance miffed investors, sending share prices down by 2.7% to $33.26 on Friday.

The bottom-line decline is largely attributable to higher tax rate and foreign currency headwinds. Moreover, tepid sales proved to be a drag.

Inside the Headlines

ITT Corp.’s third-quarter revenues came in at $581.7, down 3.4% on a year-over-year basis. However, the metric came in line with the Zacks Consensus Estimate. While contributions from the previously acquired Germany-based advanced material manufacturer – Wolverine – proved beneficial, persistent weakness in the oil and gas sector, chemical & industrial and mining markets played spoilsport. Moreover, currency fluctuations and unfavorable soft short-cycle pump activities also added to the company’s challenges.

On an adjusted basis, organic revenues decreased 10% year over year due to project declines and softness in short-cycle pumps.

Segment wise, Industrial Process revenues plunged 27.9% year over year to $195.0 million. Challenging conditions in the oil & gas sector, mining, chemical & industrial markets, as well as softness in short-cycle pumps and aftermarket businesses, weighed down the sales performance of this segment. Also, currency fluctuations compounded the fall.

Revenues at the Interconnect Solutions segment were down 5.1% year over year to $78.6 million. Sluggish oil and gas markets, along with currency fluctuations proved to be a drag on the segment’s performance.

Control Technologies revenues inched up 1% to $70.5 million on a year-over-year basis. This segment primarily benefited from impressive performance of the industrial energy absorption markets. 

Motion Technologies revenues surged 32.7% year over year to $238.7 million on the back of significant share gains and market growth from stellar sales of automotive brake pads to both OEM and aftermarket customers. Also, the Wolverine buyout proved conducive to the sales growth of this segment.

ITT Corp.’s adjusted segment operating income declined about 19.4% year over year to $72.8 million, mainly hit by lower pump volumes, pricing headwinds and lackluster profitability on complex projects at Industrial Process.

Axtone Acquisition

Concurrent with the earnings release, ITT Corp. announced that it has entered into an agreement to buy engineered and customized components manufacturer – Axtone – which provides components for railway and other harsh-environment industrial markets. The transaction represents a cash consideration of approximately $118 million that will be primarily funded from the ITT Corp.’s foreign cash. This buyout is expected to be completed in first-quarter 2017 after meeting customary closing conditions.

Headquartered in Kanczuga, Poland, Axtone projects to generate 2016 revenues of approximately $80 million and adjusted EBITDA of approximately $14 million. ITT Corp. believes that this acquisition will be complimentary to its KONI brand. This, in turn, will fortify its foothold in the transportation industry – including railway, aerospace and automotive.

Precisely, this strategic buyout will boost ITT Corp.’s thriving Motion Technologies business and aid it gain a higher share in profitable aftermarkets. ITT expects the deal to be accretive to its earnings in the first full year of operations after its conclusion.

ITT INC Price, Consensus and EPS Surprise

 

ITT INC Price, Consensus and EPS Surprise | ITT INC Quote

Liquidity and Cash Flow

As of Sep 30, 2016, the company had cash and cash equivalents of $475.8 million, up from $433.3 million at end of Jun 30, 2016.

For the nine-month period ended Sep 30, 2016, net cash from operating activities totaled $146.7 million compared with $147.1 million in the year-ago period.

Share Repurchase

Year to date, the company has executed share repurchases of $70 million.

Guides Down

Concurrent with the third-quarter earnings release, ITT Corp. lowered its top- and bottom-line guidance. The company currently projects adjusted EPS in the range of $2.20–$2.30, instead of the earlier guidance of $2.34–$2.46. The downcast outlook is a result of lower project profitability and unfavorable foreign exchange at Industrial Process. Also, a higher tax rate is likely to have an adverse effect on the adjusted EPS.

In addition, the company expects GAAP revenue decline for 2016 in the range of 5–6% as against the previous guidance of 3–5%. Also, organic revenue decline is estimated to be in the range of 9–10%, compared with the earlier guided range of 7–9%. The downward revision of revenue guidance is attributable to lower short-cycle pump and project activity across all key end markets.

To Conclude

Prolonged weakness in the oil and gas sector as well as chemical and mining markets has taken a toll on ITT Corp.’s financial performance over the past few quarters. Based on unfavorable oil price movements, the company anticipates decline in revenues of oil and gas segments in 2016. As upstream oil projects are the most vulnerable to decline in oil and gas prices, the company forecasts sharp revenue decline. Also, project delays lower capital expenditure on part of clients, high cost of projects and pricing pressures are adding to the ITT Corp.’s challenges.

Decline in short-cycle upstream oil and gas connector business is expected to aggravate slowdown in the upstream business. Moreover, an anticipated softness in midstream and downstream markets due to delayed project activity, pricing pressure and overall market uncertainty add to the Zacks Rank #4 (Sell) company’s concerns.

Despite these challenges, ITT Corp. has been diligently following its restructuring actions since the commencement of the market downturn, which has led to tangible productivity improvements, of late. The company’s transportation business is reaping significant benefits of these restructuring actions. We believe that these actions, along with effective capital deployment and risk mitigation strategies will assist the company steer past some of these headwinds. 

Stocks to Consider

Some better-ranked stocks in the sector include Danaher Corp. (DHR - Free Report) , Macquarie Infrastructure Corp. (MIC - Free Report) and Leucadia National Corp. (LUK - Free Report) . While Danaher and Macquarie Infrastructure carry a Zacks Rank #2 (Buy), Leucadia National (LUK - Free Report) sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Danaher Corp. is a global conglomerate that designs, manufactures and markets diverse lines of industrial and consumer products. The company has a decent earnings surprise history, beating estimates thrice over the trailing four quarters. It has an average positive surprise of 6.1%.

Macquarie owns, operate and invests in a diversified group of infrastructure businesses, which provide basic, everyday services, in the U.S. and other developed countries. Per analysts, the company is projected to generate earnings growth of 184.9% in the current fiscal year, compared with 5.1% for the industry.

Leucadia is a diversified financial services holding company, principally engaged in personal and commercial lines of property and casualty insurance, life insurance, banking and lending and manufacturing. Leucadia has a long-term earnings growth expectation of 18.0% and is currently trading at a forward P/E of 89.6x.

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