Note: This report contains substantially new material. Subsequent reports will have new or revised material highlighted.
Reason for Report: Flash Update : 1Q13 Earnings Update
Previous Edition:Mar28, 2013; 4Q12 Earnings Update
Flash Update [earnings update in progress; to follow]
ITT Earnings Beat Estimates – May 02, 2013
ITT Corporation reportedfirst quarter 2013 earnings per share of 47 cents, which were 9.3% above the Zacks Consensus Estimate of 43 cents. Earnings were up 21% year over year. Profits during the quarter were driven by stronger operational performance, improved volumes and favorable mix.
On a GAAP basis, the company reported earnings of 20 cents a share compared to 11 cents a share in the year-ago quarter.
Total Revenue
Total revenue in the quarter increased 7.1% to $608.2 million compared to $568.1 million in the prior-year period. Organic revenue for the quarter grew 2% for the quarter. Revenue growth during the quarter was driven by 11% increase in emerging markets. In addition, gains in key global end-markets including energy and transportation and a solid performance from the recently acquired Bornemann Pumps business all contributed the top-line growth.
Segment Results
The Industrial Process segment reported revenues of $257 million, reflecting 14.0% increase. Organic revenues were flat compared to the prior year. Results during the quarter were driven by 28% increase in organic global oil and gas shipments as well as the impact from the company’s successful acquisition of Bornemann Pumps, partially offset by mining declines in emerging markets.
Revenues in theMotion Technologies increased 7% to $193 million, driven by significant gains in the global automotive brake pad market. The top line also reflected a 24% increase in the United States, 20% growth in emerging markets and 3% growth in difficult Western European automotive markets, which was partially offset by weakness in the global rail shock absorber market.
Interconnect Solutionsrevenue for the quarter declined 2% to $91 million, as gains in general industrial and oil and gas connectors were offset by weakness in European aerospace, transportation and communication connectors. Organic revenue declined 1%.
Control Technologies, revenue decreased 2% to $69 million as growth in North American and European aerospace was offset by declines related to the fulfillment of an aerospace program and weakness in the global general industrial and defense markets.
Income and Expenses
For 2012, the company reported operating income of $37.2 million compared to $36.7 million in the prior-year quarter. The increase was driven by increased volume and strong operating productivity, partially offset by negative project mix shift and post-spin incremental recurring costs.
Balance Sheet & Cash Flow
At the end of the quarter, cash and cash equivalents were $483.1 million with no long-term debt. The company had shareowner’s equity of $662.7 million.
Outlook
Concurrent with the full year earnings release, the company announced 2013 guidance. ITT expects adjusted earnings per share to increase 10% in the range of $1.80 to $1.90 per share. The guidance reflects a $0.02 negative impact from the recent currency devaluation in Venezuela.
Total revenue is expected to grow 9% to 11% driven by growth in the oil and gas, chemical and industrial markets, share gains in the global automotive market, the impact of the Bornemann Pumps acquisition and emerging market growth, partially offset by weakness in the mining and defense end markets.
MORE DETAILS WILL COME IN THE IMMINENT EDITIONS OF ZACKS RD REPORTS ON ITT.
Portfolio Manager Executive Summary [Note: Only highlighted material has been changed]
ITT Corporation (ITT) is a high-technology engineering and manufacturing company, operating in three vital markets, in all the seven continents. It is engaged in water and fluids management, global defense and security, and motion and flow control. With the acquisition of Nova Analytics, ITT has entered new business segments globally, expanding the Company’s presence in categories adjacent to its core businesses and building on its global leadership positions in key markets.
Of the seven firms covering the stock, three (42.86%) gave positive ratings, three (42.86%) gave neutral ratings and one (14.29%) firm gave a negative rating.
Bulls (Buy or equivalent outlook) – 3/7 These firms are of the opinion that as the Company is well diversified and serves attractive end markets with a broad geographic footprint and will continue to deliver solid revenue and earnings gains. They believe that a strong balance sheet should help the Company navigate through the credit crunch and may even provide some good opportunities emanating from the market that the Company may take advantage of. Many investors have thought that ITT would be better served by splitting the Company into multiple pieces to unlock value that was not reflected in the stock's valuation. ITT's announcement of splitting into three pieces is reflective of the Company's Board deciding that the value of a multi-industry company with disparate business units that did not make sense to many on the outside is better served as three stand-alone public companies. All three companies are set to have investment grade balance sheets, which will put each entity in a good position to continue their respective growth trajectories.
Cautious (Neutral or equivalent outlook) – 3/7Though these firms are impressed with strong performance in the Motion and Flow Control businesses and recovery in Fluid Technology, they are concerned about expected revenue challenges in the Defense segment due to ITT's high proportional exposure to declining military operations. ITT shares have been range-bound over the past year at a steep 30% discount to its Multi-Industry peers as investor sentiment focused on the wind-down of ITT's defense programs and defense budget cuts. The proposed break-up unlocks value by enabling the water technology and the industrial businesses to trade closer to their peer-group average multiples, which are well above ITT's current multiple, and would also create the leading stand-alone water technology company.
Bearish (Negative or equivalent outlook) – 1/7 The firm believes that the most significant catalyst for shedding ITT’s “conglomerate discount” is reduced M&A risk to diversify away from Defense. However, given the stock’s appreciation it believes that the upside potential remains relatively less attractive than other names within the multi-industry coverage universe.
The firms believe the following additional factors should also be taken into consideration for investing in the stock:
- The Company is the largest supplier of pumps worldwide, specializing in supplying pumps and pumping systems to the water/wastewater market. It possesses a leadership role in its core markets such as water-related pumps and systems, and technology-based weaponry and defense.
- The process control industry is a highly competitive and fragmented industry. Some of its main competitors are Lockheed Martin Corporation, Raytheon Co.
- Management expects continued share gain from smaller competitors given their strong brand names (No.1 and No. 2 in many global markets), distribution channel, and innovative products.
- The Company’s balance sheet remains solid and its steady efforts to reduce working capital are impressive.
General Outlook: The firms in general believe ITT actively manages its portfolio to maximize growth, profitability, and cash flow. The water and wastewater market offers one of the most attractive secular themes in the process control industry. The firms expect ITT to acquire more niche-oriented or technology-rich companies in this sector. The Company stated that it is restructuring to boost its technology offerings and streamline operations. Management believes Nova Analytics’ portfolio of recognized testing and instrumentation brands would enable it to build a strong platform in the $6.0 billion global analytical instrumentation market.
March19,2013
Overview[Note: Only highlighted material has been changed]
New York-based ITT Corporation (ITT or the Company) designs, manufactures, and sells a range of engineered products and provides related services worldwide. It is a multi-industry company that focuses on three primary business segments. The Defense & Information Solutionssegment serves military forces and other government agencies with products and services such as air traffic control systems, night vision devices, satellite instruments, and tactical communication systems. This segment, before its realignment in January 2010, was known as Defense Electronics & Services segment. The Fluid Technologysegment is the largest pump company worldwide, primarily serving the water/wastewater market as well as several other general industrial markets. The Motion & Flow Controlsegment produces fluid handling materials for various niche industrial markets, specialty shock absorbers and brake friction materials for the transportation industry, and pump products for the marine and leisure markets. More information is available at the Company’s website:
Key investment considerations as identified by the analysts are as follows:
Key Positive Arguments / Key Negative Arguments- Compelling Fundamentals: The Company is a diversified company with a long history of opportunistic change. It holds leading positions in its served end markets, has well recognized brand names, and benefits from its extensive distribution outlets.
- Competitive Position: The Company actively manages its portfolio to maximize growth, profitability, and cash flow. Its strategies, actions, and results distinguish it from other industrial companies that rationalize their slow growth.
- Improving Economy: An improving global economy along with European stimulus benefits is significantly deriving revenue growth in the Motion & Flow Control division.
- Acquisition: The acquisition of Nova Analytics expands ITT’s presence in categories adjacent to its core businesses, enabling it to build a strong platform in the $6.0 billion global analytical instrumentation market.
- Cyclicality: Many of ITT’s end markets are cyclical. Therefore, its revenue and profits can suffer because of cyclical downturns.
- Exchange Rate Risk: The Company operates in several overseas markets and is susceptible to exchange rate risks that could adversely affect its profitability.
- Competition: The competitive nature of the process control industry motivates companies to target market share at the expense of margins in which case ITT could be negatively impacted both in revenues and earnings.
- Declining Military Operations: The revenue from the Defense & Information Solution segment is negatively affected by the declining military operations to which ITT has a high proportional exposure.
Note: the Company’s fiscal year coincides with the calendar year.
March19,2013
Long-Term Growth[Note: Only highlighted material has been changed]
The Company actively manages its portfolio to maximize growth, profitability, and cash flow. Its strategies, actions and results distinguish it from other industrial companies that rationalize their slow growth. The Company’s growth strategy is focused on leadership in growth markets, both industrial and technology based. However, the process control industry is a highly competitive and fragmented industry. The existing and potential markets of ITT are served by many international, national or regional fluid handling companies. Competitors often target market share at the expense of margins in which case, ITT could be negatively impacted both in revenues and earnings.
Management has a practical but aggressive set of 5 strategies to ensure that ITT remains comfortably positioned to emerge from the current downturn stronger and more distanced from its competitors : (1) focus on customer – ITT is enhancing its sales incentives and increasing R&D while many competitors are retrenching; (2) focus on cost – rate of change in costs versus sales against head count is more critical than ever, so ITT will increase restructuring to aggressively manage costs; (3) focus on cash – to ensure strong liquidity, ITT is working overtime to drive strong cash conversion and ensure judicious use of cash generated; recent dividend increase signals strong confidence in the company’s ability to sustain robust cash flow from operations; (4) taking care of employees – ITT implemented executive pay reductions to be able to pay merit increases to employees; while reducing head count by 2,000 since fall 2008. The Company is working overtime to reward those who are highly valued; and (5) keeping long-term strategies in tact – ITT is continuing to increase R&D to advance new program capabilities, ensuring strong relative performance versus competitors while seeking potential opportunistic acquisitions.
ITT Corp. remains focused on merger and acquisition ambitions in the water sector. The three potential growth markets identified by management include analytical testing instruments (Danaher is No. 1 in a highly fragmented market), dewatering (ITT already has a presence here), and expansion into membrane-based filtration and ultrafiltration. These higher-tech sub-sectors of the global water sector tend to have higher embedded technology and growth, and command higher valuation multiples.
The firms remain concerned about the long-term visibility of the Defense sector as inflating fiscal deficits and a new administration make risk around Defense budget cuts more acute. A lack of early-cycle leverage could eventually cause the sector to fall out of favor with investors, which makes up over 60.0% of ITT’s operating profits and has been the main driver of growth this cycle. Positively, the Company continues to pursue new Defense revenue areas, while engineering service expansion, international growth opportunities, and the next generation night vision goggle should provide an important barrier to future Defense headwinds.
By 2025, it is estimated that about one third of the world’s population will not have access to adequate drinking water. The Company projects that over the next 20 years the global market for water and wastewater infrastructure will total $3.0 trillion globally and $1.2 trillion in the US. ITT Corp.’s leading market positioning places the Company at the forefront of many global water markets. With the global water industry estimated to be worth $365 billion, there is plenty of scope for market expansion and new project development for the Company. However, the analysts are of the opinion that Chinese companies could give a stiff competition to ITT due to their cost advantages.
March19,2013
Target Price/Valuation[Note: Only highlighted material has been changed]
Provided below is the summary of valuation and ratings as compiled by Zacks Research Digest:
Rating DistributionPositive / 42.86%↔
Neutral / 42.86%↔
Negative / 14.29%↔
Avg. Target Price / $25.50↑
Digest High / $31.00↑
Digest Low / $16.00↔
No. of analysts with target price/Total analysts / 7/7
Key risks that can impede the achievement of target price include a deterioration of global water end markets, particularly the US and Europe municipal spending, sustainability of the US defense budget, and unforeseen softness in the European commercial markets.
Recent Events
On Mar 6, 2013,ITT Corporation announced that it has launched a new website to better serve its customers with enhanced usability and functionality.
On Feb 27, 2013,ITT Corporation announced a quarterly cash dividend of $0.10 to shareholders of record as on Mar 15, 2013, payable on April 1, 2013.The company also announced an additional share repurchase program of $75 million shares.
On Feb 27, 2013,ITT Corporation reported its strong fourth quarter and full year 2012 results. Quarterly earnings from continuing operations of 37 cents were a penny below the Zacks Consensus Estimate and were up 8.7% year over year. Profits were driven by momentum across the company business segments.
On a GAAP basis earnings were 18 cents a share, 51.4% below the Zacks Consensus Estimate and down 10% year over year.
Total revenue increased 2.7% to $567.5 million, compared with $552.4 million in the prior-year period. Organic revenue grew 6% for the quarter. Revenue was below the Zacks Consensus Estimate of $570 million. The top line was driven by 18% U.S. growth, strength in core markets such as mining, chemical and general industrial and share gains in the global automotive market.
Revenue[Note: Only highlighted material has been changed]
Total revenue increased 2.7% to $567.5 million, compared with $552.4 million in the prior-year period. Organic revenue grew 6% for the quarter. Revenue was below the Zacks Consensus Estimate of $570 million. The top line was driven by 18% U.S. growth, strength in core markets such as mining, chemical and general industrial and share gains in the global automotive market.
Provided below is a summary of revenue as compiled by Zacks Research Digest:
Revenue ($ in M) / 4Q11A / 4Q12A / FY12A / 1Q13E / 2Q13E / FY13E / 2014EDigest High / $509.9 / $554.3 / $2,228.0 / $608.7 / $607.5 / $2,474.0 / $2,630.0
Digest Low / $509.9 / $554.0 / $2,227.8 / $599.0 / $597.0 / $2,442.6 / $2,580.2
Digest Average / $509.9 / $554.2 / $2,227.9 / $603.9 / $602.3 / $2,458.3 / $2,605.1
Y/Y Growth / 8.7% / 10.3% / 6.0%
Q/Q Growth / 9.0% / -0.3%
Note: Blank cells denote that the brokers did not provide any estimates.
Outlook
The company is anticipating that the revenue for 2013 will grow by 5% - 7%. Mainly resulting from growth in the Global Automotive Sector.
Revenue by Segment
Revenue at the Industrial Process segment was up 16% to $233 million while organic revenue grew 15% compared with the prior year. This increase reflects strength across all end-markets served in North America, global mining strength and a 19% increase in aftermarket revenue.