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Company Overview: ITT Corporation designs, manufactures, and sells a range of engineered products, and provides related services worldwide. The company’s Defense segment provides a range of information, situational awareness, and electronic warfare systems for multiple military aircraft, surface ships, submarines, and ground vehicles; systems integration, communications, engineering, and technical support solutions; a range of research, technologies, and engineering support services to government, industrial, and commercial customers; and systems support solutions for combat equipment, tactical information systems, and facilities management. This segment also offers wireless networking systems for tactical military and government systems; hardware and software for the U.S. government, law enforcement agencies, and commercial use; night vision equipment; and remote sensing and navigation solutions to customers in the defense, intelligence, space science, and commercial aerospace communities.
Prognosis: The stock is currently stuck at the low end of its 52 week range due mainly to concerns that defense spending will need to be cut in the coming years. We believe ITT is being unfairly punished since a good portion of their products are in the intelligence and electronic portion of defense spending, which should fare better than major weapons programs.
Valuation: ITT is selling at approximately 11.5 times this year’s consensus earnings and roughly 10 times next year’s projected earnings. ITT is selling near the bottom of its five year range by any valuation metric (P/E, P/S, P/B, P/CF). The dividend yield is slightly above 2%.
Catalysts: There are several factors that we believe should provide support for a higher stock price in the near and medium term:
1. Stock has been unfairly punished by worries that defense spending slowdown will affect their backlog. Product line should be less impacted than priced in the market right now.
2. The motion and flow segment (approximately 10% of overall revenue) should grow slightly above 10% with decent worldwide growth. Fluid technology (Approximately 30% of overall revenue) should also grow over 5%.
3. Balance sheet is strong and steadily improving cash flow gives the company good flexibility going forward to make strategic acquisitions and increase dividends in the future.
Recommendation(s): Given ITT’s valuation, increasing cash flow, revenue and earnings growth; we feel stock is currently undervalued. In our opinion, the stock should be trading at a more reasonable rate of approximately 12-13 times next year’s projected earnings of around $4.55. Our target Price is $54-$59, up from the current price of $46.60.



Disclosure: Long ITT

Source: The Case for ITT