ITW Earnings: Results in Line with Expectations; Enterprise Initiatives Drive Margin Improvement

We see no reason to alter our $203 fair value estimate following narrow-moat rated ITW’s ITW second quarter 2023 results. Consolidated revenue rose to $4.07 billion or 3% organically, while operating margins rose 170 basis-points to 24.8%. This lifted GAAP EPS by 5% year on year to $2.48.

There were some puts and takes during the quarter, with the auto OEM segment performing better than we hoped. That said, some of ITW’s other businesses came in a bit under expectations. In fact, from a top-line basis, auto OEM led all the other segments. Its organic sales roared back by over 16% to $826 million. Auto OEM’s China business deserves special mention since sales there grew 51% year on year, though all regions grew.

ITW’s management reiterated that it plans to move auto OEM margins back to over 20% over the next 3 years, which is a view we share based on the incremental margin we’re used to seeing from this business. We also expect that its operating margins will breach the high-teens as we exit 2023. While management highlighted this business would see strength based on COVID-related headwinds abating, we were still surprised by the China sales figure. Management highlighted this is a business that continues taking share on new product introductions, particularly on electric vehicles, which is nice to see.

From an operating margin standpoint, welding was the big mover, followed by food equipment. Welding managed to impressively improve its operating margins by a resounding 490 basis-points, despite benefiting from 1% organic growth (though the low organic growth was off a difficult comparison). As with the case in the construction products segment, ITW is pushing its enterprise initiatives through in welding, though price/cost also helped, to a lesser degree. For reference, “enterprise initiatives” is ITW’s nomenclature for adopting the Pareto principle (focusing on the highest-margin products and customers), as well as it supply chain sourcing efforts.