Earnings Scorecard: Illinois Tool Works

Feb. 7.11 | About: Illinois Tool (ITW)

Despite posting somewhat disappointing fourth quarter results, that fell a cent short of the Zacks Consensus Estimate, sentiments were overall positive for Illinois Tool Works Inc. (NYSE:ITW) triggered primarily by the company’s robust guidance for the first quarter of 2011 and the fiscal year 2011.

Earnings Review

Illinois Tool fourth quarter earnings per share from continuing operations were 79 cents, down 19% from 98 cents in the comparable quarter of 2009 and below the Zacks Consensus Estimate of 80 cents. Results were, however, within management’s guidance range of 74-82 cents. In the fiscal year 2010, earnings per share were $3.03, below the Zacks Consensus Estimate of $3.08.

Operating revenue in the quarter increased 11.0% year over year to $4,169.3 million, above the Zacks Consensus Estimate of $4,089.0 million and in fiscal year 2010 was $15,870.4 million, up 14.4% year over year.

Agreement of Analysts

Following the company’s earnings release, estimates for Illinois Tool were unanimously increased, although one analyst lowered the earnings estimate for the fiscal year 2012. In the last 7 days, estimates for fiscal year 2011 were increased by 10 analysts while that for 2012 by 7 analysts.

Positive revision incorporates the company’s earnings growth potential arising from incremental benefits from acquisitions and efforts to reduce costs to improve margins. The company aims at achieving acquired revenue of $800 million to $1 billion in 2011, as compared with $530 million achieved in 2010.

Moreover, continuous improvement in end market demand, especially in welding, electronics, industrial packaging and test and measurement businesses seems to be a promising growth driver for the company. North American auto builds in 2011 is expected to be roughly 12.4-12.6 million units, representing market growth of 5%.

Magnitude of Estimate Revisions

EPS estimates for fiscal year 2011 and 2012, in the last 7 days, inched up six cents each to $3.75 and $4.39, respectively. First quarter 2011 estimate was also up by six cents to 82 cents.

Earnings estimate for 2011 represents a year-over-year growth of 23.65% while for 2012 it was 17.24%. First quarter estimate represents annualized growth of 41.26%.

Our Take

We believe Illinois Tool stands well positioned to grow in the quarters ahead as evident from the company’s promising EPS guidance of $3.60-$3.84, with mid-point up 23% year over year and the revenue growth expectation of 11.5%-14.5%.

It is anticipated that near-term results would be largely influenced by the strengthening end markets, restructuring benefits and share buybacks, offset partially by incremental international sales carrying lower margins compared with domestic sales. Over the medium to long term, prime driving catalysts will include a strong acquisition pipeline and recovery in economic conditions.

However, immense competitive pressure, especially from Cooper Industries plc (CBE), General Electric Co. (NYSE:GE), and Manitowoc Co. Inc. (NYSE:MTW), and huge exposure to foreign currency puts the company in an unfavorable position.

We currently maintain a Neutral recommendation on the stock.