Illinois Tool Works (ITW) Up 4.2% Since Earnings Report: Can It Continue?

It has been about a month since the last earnings report for Illinois Tool Works Inc. (NYSE:ITW) . Shares have added about 4.2% in that time frame.

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

First-Quarter 2018 Highlights

Illinois Tool Works kept its earnings streak alive in the first quarter of 2018 and delivered a positive earnings surprise of 2.7%.

The industrial tool maker’s earnings in the quarter came in at $1.90 per share, above the Zacks Consensus Estimate of $1.85. Also, the bottom line reflects 23% growth from the year-ago tally of $1.54 on the back of sales growth, benefits from enterprise initiatives and a 1.8% fall in the company's share count.

Segmental Performance Drive Top Line

In the quarter, Illinois Tool Works' revenues totaled $3,744 million, up 7.9% from the year-ago tally. The improvement came on the back of 2.6% organic gains and a 5.3% positive impact of foreign currency movements.

Also, the top line surpassed the Zacks Consensus Estimate of $3.67 billion.

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

Test & Measurement and Electronics' revenues in the first quarter increased 13.1% year over year to $543 million. Revenues from Automotive OEM (Original Equipment Manufacturer) grew 8.8% to $901 million. Food Equipment generated revenues of $527 million, increasing 6% year over year.

Welding revenues came in at $423 million, growing 9.4% year over year. Construction Products' revenues were up 8.3% to $428 million, while revenues of $485 million from Specialty Products reflect growth of 4.9%. Polymers & Fluids' revenues of $442 million increased 3.8% year over year.

Margin Improves

In the reported quarter, Illinois Tool Works' cost of sales increased 8.9% year over year to $2,181 million. It represented 58.3% of the quarter's revenues versus 57.7% in the year-ago quarter. Selling, administrative, and research and development expenses inched up 0.7% year over year and came in at 16.3% of revenues versus 17.5% in the year-ago quarter.

Operating margin improved 90 basis points (bps) year over year to 24.1%. The improvement was driven by a 110-bp contribution from enterprise initiatives, offsetting a 50-bps adverse impact from unfavorable price/costs.

Balance Sheet and Cash Flow

Exiting the first quarter, Illinois Tool Works' cash and cash equivalents were approximately $1,940 million, down from $3,094 million recorded at the end of the previous quarter. Long-term debt decreased 7.9% sequentially to $6,889 million.

In the first quarter, net cash generation from operating activities totaled $538 million, reflecting growth of 16.2% over the year-ago quarter. Capital spending on purchase of plant and equipment was $94 million, higher than $64 million used in the year-ago quarter. Free cash flow was $444 million, reflecting year-over-year growth of 11.3%.

Outlook

For 2018, Illinois Tool Works anticipates gaining from strengthening demand, enterprise initiatives and a healthy business portfolio. It increased its earnings guidance to $7.60-$7.80 per share, reflecting growth of 15 cents at mid-point from the previous projection of $7.45-$7.65. This current projection reflects year-over-year growth of 17% at mid-point.

Organic growth is expected to be 3-4%, while operating margin will likely be within 25-25.5%. The expected tax rate is roughly 25%. Free cash flow will likely be roughly at 100% of net income.

On a segmental basis, Automotive OEM's organic sales are predicted to grow 4-5% in 2018. The segment will benefit from growth in content per vehicle, business opportunities in China and anticipation of 2% growth in global auto production. Food Equipment will gain from new product launches. Its organic sales are anticipated to grow 2-3%. Test & Measurement and Electronics' organic sales will likely grow 4-5% while that for Polymers & Fluids will increase 2-3% and Construction Products will grow 3-4%. Weldings' organic sales growth is anticipated within 5-6% while that for the Specialty segment to be below the previous projection of 3-4%.

For second-quarter 2018, earnings per share are expected within $1.90-$2.00, reflecting year-over-year growth of 15% at the mid-point. Organic revenue growth is expected to be 3-4%.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. There have been four revisions higher for the current quarter compared to two lower.

VGM Scores

At this time, ITW has a nice Growth Score of B, though it is lagging a bit on the momentum front with a C. The stock was also allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Based on our scores, the stock is more suitable for growth investors than those looking for value and momentum.

Outlook

Estimates have been broadly trending upward for the stock and the magnitude of these revisions indicates a downward shift. Notably, ITW has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.