Saturday, October 24, 2009

3Q 2009 Earnings for Illinois Tool Works Incorporate

Illinois Tool Works Inc. posted 3Q 2009 earnings this past Tuesday, October 20th.

The highly diversified industrial parts manufacturer announced a third-quarter profit of $0.66 per share, revenue of $3.580 billion, and net income of $302 million.

Year-over-year EPS declined 11 cents a share from $0.87 per share in 3Q 2008. However, ITW beat the estimates on the street, which were around $0.53 per share.

Overall revenue dropped nearly 20 percent from last year’s third quarter revenues of $4.464 billion and profits fell $151 million from $453.5 million in 3Q 2008. Management was able to offset these significant declines by implementing extremely effective cost measures as operating margins only decreased 1.5% from 15% in 3Q 2008 to 13.5% in 3Q 2009. In addition, operating margins increased by 360 basis points from 2Q 2009. Sales have dropped dramatically from the previous year as almost all of ITW’s end users have significantly reduced production and output, therefore decreasing the demand for ITW’s products. In addition, ITW sells a good chunk of their industrial productions through various distributors who have focused on using up inventory stock piles to fulfill orders instead of purchasing products through ITW in an effort to increase their own performance.

Management expects total revenue for 2009 to fall within $14.124 billion (-11% of 2008 revenue) to $15.075 billion (-5% of 2008 revenue). The 2009 profit outlook range is $1.74 to $1.80 per share. Current estimates on the street range from $1.64 to $1.87 per share. Management was also upbeat about the significant improvement in their auto related sales in North America. This improvement may be slightly illusionary as the auto market was at an incredible low last year and sales were boosted significantly in the 3Q by the temporary “cash for clunkers” program. Regardless, any improvement in the auto industry is a good one. In addition, management has seen a significant increase in the residential housing starts over the past 9 months and projects the housing market in North America to continue its slow creep.

As far as ITW going forward, it is hard to tell. Management does not give any profound or significant guidance and it is clear that their main focus has been on managing operating costs. One of our original catalysts regarding ITW was their strong acquisition history. However, there was an all time low in acquisitions during 3Q 2009, but management has stated that projected acquisitions in the fourth quarter could be as high as $200 million. There is no doubt that ITW is a tremendously diversified company with over 875 operations in 54 countries. It may be worthwhile to wait and see how ITW’s acquisition strategy pans out over the fourth quarter. It is a solid company that has performed well for us, but if management does not focus on increasing shareholder value relatively soon, it should be put up on the chopping block so we can take our gains and using them towards a more worthwhile investment.

-Matthew Opanowski

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