Illinois Tool (ITW) Beats Q4 Earnings & Sales, Ups '18 View

Industrial tool maker Illinois Tool Works Inc. (NYSE:ITW) kept its earnings streak alive in fourth-quarter 2017, pulling off a positive earnings surprise of 4.9%. Results were primarily driven by sales growth, benefits from enterprise initiatives and 2.4% fall in the diluted share count due to the company’s active share buyback activities.

Earnings, excluding roughly $1.92 per share of tax charge in the quarter, came in at $1.70 per share, topping the Zacks Consensus Estimate of $1.62. The bottom line increased roughly 17% from the year-ago tally of $1.45.

For 2017, the company’s earnings were $6.59 per share, lagging the Zacks Consensus Estimate of $6.70. However, the figure grew 16% year over year. As noted, the bottom-line results excluded roughly 17 cents benefit accrued from a legal settlement and $1.90 per share of tax charge.

Revenues Driven By Organic and Forex Gains

Revenues in the quarter totaled $3,629 million, reflecting growth of 7% from the year-ago tally. The improvement was driven by 3.7% organic gains and 3.2% positive impact of foreign currency movements, partially offset by 0.1% negative impact from acquisitions/divestitures.

Also, the top line surpassed the Zacks Consensus Estimate of $3.55 billion.

Illinois Tool Works reports its revenues under the segments discussed below:

In the quarter, Test & Measurement and Electronics’ revenues increased 11.7% year over year to $545 million. Revenues from Automotive OEM (Original Equipment Manufacturer) grew 7% to $828 million. Food Equipment generated revenues of $548 million, increasing 3% year over year.

Welding revenues came in at $388 million, growing 7.4% year over year. Construction Products’ revenues were up 6.7% to $412 million while revenues of $487 million from Specialty Products reflected growth of 6.9%. Polymers & Fluids’ revenues of $427 million increased 4.9% year over year.

For 2017, the company’s revenues totaled approximately $14,314 million, increasing 5.3% year over year. Also, the figure surpassed the Zacks Consensus Estimate of $14.2 billion.

Margin Profile Improves

In the quarter, Illinois Tool Works’ cost of sales increased 5.9% year over year, representing 58.5% of total revenues compared with 59% in the year-ago quarter. Selling, administrative, and research and development expenses, as a percentage of total revenues, came in at 16.7%.

Operating margin improved 160 basis points (bps) year over year to 23.4%, driven by roughly 140 bps contributions from enterprise initiatives.

Cash Position Strong, Debt Increases Slightly

Exiting the fourth quarter, Illinois Tool Works had cash and cash equivalents of approximately $3,094 million, up from $2,785 million in the previous quarter. Long-term debt was $7,478 million versus $7,439 million in the previous quarter.

The company generated net cash of $695 million from its operating activities in the quarter, up 4.7% year over year. Capital expenditure on purchase of plant and equipment totaled $78 million. Free cash flow was $617 million, reflecting a conversion rate (as a percentage of adjusted net income) of 106%.

Outlook

For 2018, Illinois Tool Works increased its GAAP earnings guidance to $7.45-$7.65 per share, reflecting 40 cents growth at mid-point. The increase reflects the positive impact of tax rate cuts to 25-26% and forex gains.

For first-quarter 2018, GAAP earnings per share are expected within $1.80-$1.90. Organic revenues are expected to be 3-4%.

In addition to these, the company declared its intention to increase the dividend payout rate from 43% to 50% of free cash in August 2018. However, this increment is still subject to the company’s board approval.

Illinois Tool Works Inc. Price and Consensus

Illinois Tool Works Inc. Price and Consensus | Illinois Tool Works Inc. Quote

Zacks Rank & Key Picks

With a market capitalization of $59.3 billion, Illinois Tool Works carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the industry are Colfax Corporation (NYSE:CFX) , Sun Hydraulics Corporation (NASDAQ:SNHY) and EnPro Industries, Inc. (NYSE:NPO) . While both Colfax and Sun Hydraulics sport a Zacks Rank #1 (Strong Buy), EnPro Industries carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Colfax’s earnings estimates for 2018 improved in the last 60 days. The company pulled off an average positive earnings surprise of 5.31% in the last four quarters.

Sun Hydraulics’ financial performance was impressive, with an average positive earnings surprise of 9.58% over the last four quarters. Also, earnings estimates for 2018 were revised upward in the last 60 days.

EnPro Industries’ earnings estimates for 2018 were revised upward in the last 60 days.

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