Why Is Illinois Tool Works (ITW) Up 2.6% Since The Last Earnings Report?

It has been about a month since the last earnings report for Illinois Tool Works Inc. (NYSE:ITW) . Shares have added about 2.6% in that time frame, outperforming the market.

Will the recent positive trend continue leading up to the stock's next earnings release, or is it due for a pullback? Before we dive into how investors and analysts have reacted 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.

Third-Quarter 2017 Highlights

Illinois Tool Works reported impressive results for third-quarter 2017, pulling off a positive earnings surprise of 3.64%. Results were primarily driven by sales growth, benefits from enterprise initiatives and 2.7% fall in the diluted share count due to the company's active share buyback activities.

Earnings in the quarter came in at $1.71 per share, above the Zacks Consensus Estimate of $1.65 and roughly 14% above the year-ago tally of $1.50. As noted, the bottom-line results excluded roughly 14 cents benefit accrued from a legal settlement.

Organic and Forex Gains Drove Top-Line Results

The quarter's revenues totaled $3,615 million, reflecting growth of 4% from the year-ago tally. The improvement was driven by 2% organic gains and 2% positive impact of foreign currency movements.

Also, the top-line result surpassed the Zacks Consensus Estimate of $3.58 billion.

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

Test & Measurement and Electronics' revenues increased 1.8% year over year to $525 million. Revenues from Automotive OEM (Original Equipment Manufacturer) grew 4.1% to $795 million. Food Equipment generated revenues of $549 million, increasing 1.1% year over year.

Welding revenues came in at $378 million, growing 4.8% year over year. Construction Products' revenues were up 6% to $440 million while revenues of $498 million from Specialty Products reflected growth of 4.6%. Polymers & Fluids' revenues of $434 million increased 2.6% year over year.

Margin Profile Improves

In the quarter, Illinois Tool Works' cost of sales increased 3.3% year over year, representing 57.9% of total revenues compared with 58% in the year-ago quarter. Selling, administrative, and research and development expenses, as a percentage of total revenues, came in at 16.3%.

Operating margin improved 130 bps year over year to 24.4%, driven by roughly 110 bps contributions from enterprise initiatives. The margin excluded the impact from the legal settlement.

Cash Position Strong, Debt Increases

Exiting the third quarter, Illinois Tool Works had cash and cash equivalents of approximately $2,785 million, up from $2,496 million recorded in the previous quarter. Also, the company generated net cash of $780 million from its operating activities in the quarter, up 25% year over year. Capital expenditure on purchase of plant and equipment totaled $78 million. Adjusted free cash flow was $702 million, reflecting a conversion rate (as a percentage of net income) of 110%.

The company's long-term debt balance increased 1.1% sequentially to $7,439 million.

Outlook: Illinois Tool Works increased its GAAP earnings guidance to $6.62-$6.72 per share, reflecting 25 cents growth at mid-point.

Organic revenue growth is expected to be 2-3% while operating margin is projected to be 24.5%. Full-year free cash flow is anticipated to be in excess of 100% of net income.

For fourth-quarter 2017, GAAP earnings per share are expected within $1.55-$1.65. Organic revenues are expected to be 2-3%.

How Have Estimates Been Moving Since Then?

Following the release, investors have witnessed an upward trend in fresh estimates. There have been two revisions higher for the current quarter. While looking back an additional 30 days, we can see even more upward momentum. There have been seven five moves up in the last two months.

Illinois Tool Works Inc. Price and Consensus

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

VGM Scores

At this time, Illinois Tool Works' stock has a nice Growth Score of B, however its Momentum is doing a bit better with an A. 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.

Our style scores indicate that the stock is more suitable for momentum investors than growth investors.

Outlook

Estimates have been trending upward for the stock. The magnitude of these revisions also looks promising. Notably, the stock has a Zacks Rank #3 (Hold). We expect in-line returns from the stock in the next few months.