We recently downgraded our recommendation on Illinois Tool Works Inc. (ITW) from Outperform to a Neutral recommendation.
The industrial tools manufacturer recently reported its second quarter financial results with earnings per share of 96 cents and operating revenue of $4,615 million, up 21.5% and 17.5% year over year, respectively.
Despite the fact that the company has performed well in comparison with the year-ago quarter, we restrict our sentiments for the stock as the results are found to be toward the lower-end of the company's guidance range and have also failed to meet the Zacks Consensus Estimate. Organic revenue growth in the quarter reached 6.3%, down from 7.5% expected by the company, due primarily to softness in the industrial markets of US and Europe.
To add to the peril, the company's rising cost of sales hit the gross margins that fell 90 basis points year over year. These direct costs rose by 19.2% and accounted for 64.9% of the quarter's total revenue. Moreover, the company's operating margin was down by 50 basis points.
The current Zacks Consensus Estimate for the third quarter of 2011 stands at $1.00 per share, representing a 21.08% increase over the year-ago quarter. Estimates for 2011 and 2012 are $3.86 and $4.47 per share, reflecting a year-over -year increase of 27.39% and 15.85%, respectively.
The Zacks Estimate of the third quarter is a cent above the mid-point of the company's guided range, well supported by expectations of meaningful acquisitions in the quarter. Also, a recent 6% hike in the company's quarterly dividend rate proves to be a booster for the shareholders.
Thus, in anticipation of the company's performance to be somewhat in-line with the broader market, we restrict our downgrade rating to a Neutral recommendation.
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