Why Is Illinois Tool Works (ITW) Up 8.1% Since Last Earnings Report?

A month has gone by since the last earnings report for Illinois Tool Works (ITW). Shares have added about 8.1% 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 the most recent earnings report in order to get a better handle on the important catalysts.

Illinois Tool Q2 Earnings and Sales Beat Estimates

Illinois Tool has delivered better-than-expected results for second-quarter 2020, with an earnings surprise of 55.71%. This was the eighth consecutive quarter of impressive results. Also, the quarter’s sales surpassed estimate by 8.66%.

The industrial tool maker’s earnings in the reported quarter were $1.09 per share, surpassing the Zacks Consensus Estimate of 70 cents. However, the bottom line declined from the year-ago reported number of $2.00.

Revenue Details

Illinois Tool generated revenues of $2,564 million in the reported quarter, reflecting a decline of 29% from the year-ago figure. Top-line results were affected by a 1.5% impact of unfavorable foreign currency movement, 1% from divestitures/acquisitions, and a 26.5% drop in organic sales.

However, the top line surpassed the Zacks Consensus Estimate of $2,360 million.

Illinois Tool reports revenues under the segments discussed below:

Test & Measurement and Electronics’ revenues in the second quarter decreased 14.7% year over year to $455 million. Revenues from Automotive OEM (Original Equipment Manufacturer) declined 54.1% to $361 million. Food Equipment generated revenues of $336 million, decreasing 38.6% year over year.

Welding revenues were $298 million, declining 29.4% year over year. Construction Products’ revenues were down 11.4% to $376 million. Further, revenues of $387 million from Specialty Products reflected a decline of 18.2%. Polymers & Fluids’ revenues of $354 million declined 17.2% year over year.

Margin Profile

In the reported quarter, Illinois Tool’s cost of sales declined 24.1% year over year to $1,594 million. Selling, administrative, and research and development expenses declined 18.7% year over year to $486 million. It represented 19% of the second quarter’s revenues.

Operating margin was 17.5% in the quarter, down from 24.1% reported in the year-ago quarter due to lower volumes. However, enterprise initiatives contributed 100 bps to operating margin and cost reduction of $140 million aided.

Interest expenses in the quarter declined 7.3% year over year to $51 million.

Balance Sheet and Cash Flow

Exiting the second quarter, Illinois Tool had cash and cash equivalents of $1,812 million, up 26.7% from $1,430 million recorded at the end of the last reported quarter. Long-term debt inched up 1% sequentially to $7,765 million.

In the second quarter, the company generated net cash of $737 million from operating activities, reflecting growth of 7.6% from the year-ago quarter. Capital spending on the purchase of plant and equipment was $56 million, down 27.3% year over year. Free cash flow was $681 million, reflecting a year-over-year increase of 12%.

In the second quarter, the company’s dividend payments amounted to $1.07 per share.

Outlook

In the quarters ahead, Illinois Tool anticipates benefiting from its diversified businesses, solid product offerings, cost-management actions and healthy liquidity position. However, due to uncertainties related to the pandemic, the company kept its 2020 projections suspended.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. The consensus estimate has shifted 15.22% due to these changes.

VGM Scores

Currently, 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 D on the value side, putting it in the bottom 40% 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 upward for the stock, and the magnitude of these revisions looks promising. Notably, Illinois Tool Works has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.