“Telephones, hotels, insurance—it’s all the same. If you know the numbers inside out, you know the company inside out.”
That’s a quote attributed to Harold Geneen, the businessman who built ITT into a global conglomerate during the 1960s. That was back in the day when spreadsheets were going to safeguard the Pax Americana, and when they failed, the CIA was ready to step in, subverting democracy in Brazil and Chile for ITT’s benefit.
Only it turned out that even if you knew the numbers inside out, investors were confused by the complexity, and understandably suspicious that you were hiding something. Also, as the Pax Americana slowly crumbled, it turned out that all the different businesses were hamstrung by a centralized corporate bureaucracy, robbed of their hunger and drive.
These days, the few surviving conglomerates like General Electric (NYSE:GE) are relics of a management philosophy that’s fallen out of fashion. Corporate breakups are now all the rage. Earlier this week, I wrote about Tyco International’s (NYSE:TYC) plan to split (for a second time) into three separate companies.
And if anyone was looking for a demonstration of the merits of such subdivision, the results delivered Wednesday by the rump of the old ITT should suffice.
The new ITT is now tied to “telephone and telegraph” only by its industrial connectors business, which makes telecom parts and other electronics among its bewildering array of widgets. But mostly ITT’s business consists of pumps and valves sold to drillers, miners and chemicals makers, as well as brakes and shocks for planes, trains and automobiles, and controls for everything from airplane seats to hydraulic systems.
These are lucrative growth markets right now, as the latest results demonstrate. The company saw organic revenue growth of 10% last year, orders increased 13%, and pro-forma earnings grew 23%, even as ITT lost nearly $6 per share in the latest quarter as a result of the (mostly non-cash) restructuring charges.
Speaking of cash: as a result of spinning off its defense equipment and water infrastructure businesses into separate companies last November, ITT is sitting on $690 million of legal tender, accounting for 30% of the current market capitalization. Better still, it emerged from the divorce with no debt and lowered its unfunded pension obligations. No wonder the industrial stock has handily outperformed its siblings since the separation.
Revenue growth is expected to slow to a range of 5% to 7% in 2012, but that was in line with forecasts, and enough to give the stock a 7% bump after the earnings announcement. Investors probably liked the fact that margins expanded by a full percentage point and should continue growing (albeit more slowly) this year.
Even after the share spike, ITT is priced at 14.5 times the current year’s likely earnings (and nine times cash flow excluding the cash already on the books.) That’s in line with peers.
But ITT claims to be capturing market share, while also investing in the future. For instance, the company says it’s spending 30% above industry average in research and development, touting new products like its advanced drilling pump.
It has also invested in expanded production in Brazil for the Latin American drilling industry, and in China both for the burgeoning Chinese automotive market and eventual export to the U.S., where Ford (NYSE:F) is a big customer. Brazilian plane maker Embraer (NYSE:ERJ) has been another important source of new business.
The cost of such investments and legacy asbestos liabilities means that the dividend yield is currently a relatively pedestrian 1.4%, and share buybacks are, for now, contemplated only as a means of offsetting the dilution from stock options. But the growing cash pile gives ITT the ability to make strategic small-scale acquisitions and aggressively pursue new deals in order to secure the lucrative recurring aftermarket service contracts.
You’ve got to admire the choice to forgo the immediate gratification of a big buyback or impressive dividend hike in order to invest in the business. The late Harold Geneen would have approved.
“The only unforgivable sin in business is to run out of cash,” he once said. The new ITT is, if anything, over insured on that score. And if its business investments pan out, there will be more earnings surprises in the years ahead.