Illinois Tool Works Inc. (ITW) is slated to release its second-quarter 2010 results on Tuesday, July 20. The current Zacks Consensus Estimate for the second quarter is 83 cents, representing an annualized growth of 131%.

With respect to earnings surprise, over the trailing four quarters, Illinois Tool Works out performed the Zacks Consensus Estimate for three quarters and fell behind in one quarter. The average earnings surprise was a positive 5.50%, implying that the company has outdone the Zacks Consensus Estimate by the same magnitude over the last four quarters.

First-Quarter Performance

Illinois Tool reported encouraging results for the first quarter of 2010. Earnings per share (EPS) were 58 cents compared with a loss of 2 cents in the first quarter of 2009. This was slightly above the Zacks Consensus Estimate of 56 cents per share.

Net income was $294.3 million, up from a loss of $39.4 million in the year-ago quarter. Increase in net income was due to a growth in revenue accompanied by a decrease in operating expense. Operating expense as a percentage of revenue decreased 650 basis points.

Net operating revenues were $3,606.4 million, up 14.6% from $3,146.4 million in the comparable quarter last year. Growth in net operating revenue was based on an improvement in consumer buying patterns as well as a pick-up in industrial production and underlying end-market activity.

Revenues in the Transportation segment grew 35.6% to $587.8 million, while Power Systems and Electronics segments’ revenue jumped 13.7% to $445.4 million. Increase in transportation revenue was driven by worldwide improvement in auto builds in North America and Europe . Significant improvements in the electronics-related businesses drove the latter. Revenue in the Industrial Packaging segment increased 21.0% to $523.4 million during the first quarter based on the positive trend in the U.S. Industrial industry.

Revenue from the Food Equipment dipped 0.4% year over year to $429.4 million based on softer demand. Revenue from the Construction Products segment rose 14.2% to $369.9 million based on new housing starts and slight improvement in the housing industry worldwide. Polymers and Fluid segment revenue climbed 18.3% to $305.0 million. Decorative Surfaces upped 1.5% to $235.6 million. Revenue from other sources increased 11.4% to $731.8 million.

The company posted very strong operating margins of 13.4% in the quarter from 2.9% in the same quarter of previous year. This represented margin growth of 1050 basis points driven by higher revenues and a simultaneous decrease in operating expense.

During the first quarter of fiscal 2009, the company reported free operating cash flow of $218.7 million, down from $383.1 million in the same period of 2009. However, net debt decreased to $1,713.9 million from $1,809.8 million as of the end of the previous quarter.

For the second quarter of fiscal 2010, Illinois Tool Works expects EPS from continuing operations to be in a range of 80–86 cents versus its prior guidance range of 74–86 cents.  The guidance was based on higher revenue growth expectations in the range of 18%–20% versus the prior forecast of 15%–19% in the backdrop of healthy domestic and international demand for its products.

For full-year 2010, the company expects EPS within $2.72–$3.08 and revenue growth within 10% to 14%. Currency translation impact is expected to be in the range of 6–7 cents for the second half of 2010.

Estimates Revisions Trend

Estimates over the last 60 days, increased modestly for 2010, while remained stable for 2011 implying that the analysts do not see any meaningful catalyst for the time being. The current Zacks Consensus Estimate is $3.03 for 2010, reflecting a year-over-year growth of 38.54% and $3.62 for 2011, reflecting a year-over-year growth of 19.39%.

Agreement of Estimate Revisions

In the last 30 days, out of 20 analysts covering the stock, 4 increased their EPS estimates for 2010 and one lowered its estimate. For 2011, out of 21 analysts covering the stock, 2 revised their estimates upward, while one lowered its estimate. This implies that the positive revisions were to some extent offset by a negative revision. In the last 7 days, two analysts lowered their EPS estimates for 2011.

Magnitude of Estimate Revisions

Earnings estimate for 2010, in the last 30 days, moved 1 cent upward from $3.02 to $3.03. The upward revision was primarily due to expectations of higher organic growth in the second half of 2010. However, concerns over increasing currency headwinds restricted the magnitude of estimate revision.

Earnings estimate for 2011, in the last 30 days, remained stable at $3.62 implying the positive revisions were offset by negative revision. In the last 7 days, EPS estimates for 2011 decreased from $3.63 to $3.62 after adjusting for lower organic growth expectations.

Our Take

Illinois Tool Works, operating through 800 business units in 57 countries, is one of the leading manufacturers of industrial products and equipment.

Illinois Tool’s growth stems from its ability to develop new and improved products as well as broadening the application of established products. Improvising and developing new methods, processes and equipment along with acquisitions give the company a big push. Moreover, new products are designed to be more cost effective by eliminating steps in manufacturing processes, reducing the number of parts in an assembly, or by improving the quality of customers’ assembled products.

Prime competitors include Cooper Industries plc (CBE), General Electric Co. (GE) and Manitowoc Co. Inc. (MTW).

We believe that lack of any directional move in estimates supports a Neutral recommendation on the stock, which is supported by Zacks #3 (Hold) Rank.
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