Illinois Tool Works: Earnings Preview

| About: Illinois Tool (ITW)

Illinois Tool Works Inc. (NYSE:ITW) is slated to release its first quarter 2011 results on Tuesday, April 26. The current Zacks Consensus Estimate for earnings per share (NYSEARCA:EPS) is 84 cents, representing an annualized growth of 45.21%.

With respect to earnings surprises, over the trailing four quarters, Illinois Tool outperformed the Zacks Consensus Estimate in three quarters, while lagging behind in one quarter. The average earnings surprise was a positive 1.18%, implying that the company outperformed the Zacks Consensus Estimate by the same magnitude over the last four quarters.

Fourth Quarter Highlights

Illinois Tool’s results for the fourth quarter of 2010 were disappointing as the company’s earnings per share from continuing operations fell 19% year over year to 79 cents. Earnings also lagged behind the Zacks Consensus Estimate of 80 cents, but were within management’s guidance range of 74-82 cents.

For the fiscal year 2010, earnings per share were $3.03, below the Zacks Consensus Estimate of $3.08 but within the company's guidance range of $2.99-$3.07 and above $1.93 reported in the fiscal year 2009.

Operating revenue in the fourth quarter increased 11.0% year over year to $4,169.3 million. Revenue results were above the Zacks Consensus Estimate of $4,089.0 million. Growth in operating revenue symbolized continued improvement in end market demand. The year-over-year increase was above the company's projected growth range of 7%-9%.

Detailed discussion on the third quarter results can be found here: ITW's 4Q Falls Short of Expectation

Agreement of Estimate Revisions

In the last 7 days, out of the analysts providing estimates, 2 upped their earnings per share estimates for the first quarter of 2011, while one analyst increased it for the fiscal year 2011 and 2012.

The impact from the company’s decision to sell its finishing business to Graco Inc. for a $650 million cash consideration has been incorporated in the positive revisions for the fiscal year. Divestiture of the business, currently recorded under the ‘All Other’ segment, bodes well for ITW as it helps the company concentrate on high-growth platforms. Moreover, Illinois Tools intends to utilize the proceeds to repurchase its common shares.

Magnitude of Estimate Revisions

Estimates over the last 7 days remained intact for the first quarter of 2011 at 84 cents per share, representing a year-over-year growth of 45.21%.

Estimate for fiscal year 2011 inched up one cent to $3.82 while that for fiscal year 2012 was intact at $4.41. These estimates represented a year-over-year growth of 25.92% for 2011 and 15.61% for 2012.

Our Take

Illinois Tool Works is likely to post good results in the first quarter 2011 based on expectation of higher revenues. For the three months ended February 28, the company reported an 11% increase in its operating revenue, including a 9% rise in base revenue. End markets are strong with solid demand for the company’s products.

Management anticipates earnings per share in the first quarter to range within $1.14-$1.20, including 33 cents per share (or $166 million) of favorable discrete tax adjustment relating to the Australian tax court decision in February 2011. Total revenue growth is expected to range within 12%-15%.

Illinois Tool Works is one of the leading manufacturers of industrial products and equipment. The company faces stiff competitions from its peers including Cooper Industries plc (CBE), General Electric Co. (NYSE:GE), and Manitowoc Co. Inc. (NYSE:MTW).

We currently maintain our Neutral recommendation on the stock.