ITT Earnings: Solid Performance and Share Authorization Make the Shares Attractive

Narrow-moat-rated ITT turned in a solid third-quarter effort. Results marginally beat our expectations for revenue, adjusted operating margins, and adjusted EPS. Furthermore, management raised its guide on continued strength. Consequently, we raise our fair value estimate by over 5% to $113.

We’re expecting organic sales growth of low single digit-plus and adjusted operating margin expansion of nearly 150 basis points to 20.1% in the fourth quarter. More importantly, for the long term, we think ITT is well-positioned to continue growing revenue by midsingle digits and operating margins by 200 basis points by 2027 (from our estimated 2024 base). That’s because ITT has continued to capture key wins with the electric vehicle transition in its marquee brake pad business. We think it will continue to do so based on its exceptional delivery rates and innovations like the Smart Pad.

Furthermore, both ITT’s industrial process, or IP, and its connect and control technologies, or CCT, segments should continue to drive margin improvements, particularly as they drive greater productivity and automate manufacturing facilities. Moreover, CCT should enjoy strong volume leverage from the commercial aerospace recovery. As proof, we point to the 25% year-on-year growth in ITT’s aerospace and defense components business. In short, ITT has plenty of levers to continue the growth trajectory laid out in its 2022 investor day and beyond.

Finally, ITT announced a $1-billion share repurchase authorization back in October. We hope it buys back more shares because we think the stock is discounted relative to our revised fair value estimate. ITT also acquired a cryogenic marine pump supplier for approximately $400 million, which strikes us as a good deal because 1) it fits well into IP and 2) it implies EBITDA accretion.