At the end of 2023, I believed that shares of ITT (NYSE:ITT) looked more than fairly valued after a big re-rating throughout the year. Shares had risen some 50% in 2023 alone, leaving shares more than fully priced after a long history of restructuring and spin-offs.
So far, in 2024, shares have seen decent 10% gains, although the gains were roughly double this percentage number in recent weeks, in fact, recent trading days, as ITT continues to show continued growth. While this warrants a small premium to the market, I fail to see a great risk-reward here, even as the company actively shuffles its product portfolio to improve and hold on to its growth positioning.
ITT – A Turbulent History
ITT has a long and turbulent history, which involves multiple chapters of M&A activity, restructuring efforts and spin-offs. A $10 billion business in the late 2000s has been restructured to just a $2 billion business in the 2010s.
From this lower sales base, the company has steadily grown sales from about $2 billion to more than $3 billion, all while operating margins have risen from about 10% towards 15% of sales, complemented by share buybacks.
Through 2023 the company has grown sales to $3.3 billion, generated from the manufacturing and sale of highly engineered critical components and customized technology solutions. About 45% of sales are classified as motion technologies, a third as industrial processes and just over a fifth as connect & control technologies.
The most important end markets are automotive and rail, chemical, industrial pumps, aerospace and defense, industrial and energy applications. The business is very well diversified across the globe, with some 40% of sales generated in North America, a third in Europe, and the remainder across other important geographic areas.
Picking Up The Story
Late in 2023 the company was seeing some real momentum. At the time, the company was on track to generate $3.3 billion in sales in 2023 with adjusted earnings seen just over $5 per share. A $119 share was valued at 23-24 times earnings, while the balance sheet reveals a pretty modest net debt load following an announced $395 million deal for Danish-based Svanehoj Group A/S.
While operating momentum was impressive, I was aware of the momentum seen in the share price, after shares rose some 50% through 2023, pushing up expectations from about 17-18 times earnings to about 23 times earnings. This left it relatively easy for me to stay on the sidelines at $119 per share.
Fast forwarding half a year further, shares have mostly traded in a $115-$150 price range, having come down to $130 per share following the volatility seen early in August.
Momentum Continues
In February, ITT reported its 2023 results, a year in which revenues rose by nearly 10% to $3.28 billion. GAAP operating profits of $528 million were solid as well, for margins around 16% of sales. GAAP earnings of $410 million translated into GAAP earnings of $4.96 per share, based on a diluted share count of 83 million shares, with adjusted earnings posted at $5.21 per share.
The company outlined a solid guidance for 2024, seeing total sales up 9-12% with acquisitions contributing about 6% to this growth number. Earnings are seen up some 9% (at the midpoint of the guidance) to $5.45-$5.90 per share.
In May, the company started the year strong with convincing first quarter results. Revenues rose by 14% (of which a 9% organic revenue contribution), with adjusted earnings per share up 21% to $1.42 per share. Subsequently, the company hiked the lower end of the earnings guidance by twenty cents to $5.65-$5.90 per share.
Early in August, ITT posted a 9% increase in second quarter sales to $906 million, with adjusted earnings up 12% to $1.49 per share. Following this solid, but somewhat softer quarter, the company maintained the full-year guidance on all fronts despite the investment of Wolverine, with an estimated $0.15 per share dilutive effect. To that, I will elaborate a bit further below.
Moving Parts
Alongside the second quarter earnings report, ITT has undergone some transitions into its portfolio. In July, the company divested the Wolverine automotive components business, part of the motion business, in a $171 million deal. As this deal will bring about $0.15 per share dilution, that suggests about a $12 million dilution in actual dollar terms and that just in part of the year.
At the same time, the company announced the acquisition of kSARIA, a provider of engineered and mission-critical interconnect services for the aerospace & defense market. This deal is substantially larger, as ITT is paying $475 million to acquire these assets.
These assets will contribute some $175 million in sales, with a 2.7 times sales multiple being paid. With a prevailing $122 million net debt load as of the second quarter, the cumulative impact of the two deals means that net debt will jump to $425 million. This remains very modest, with EBITDA reported at $637 million in 2023, and this number likely increasing during 2024. Nonetheless, it seems obvious that the company is selling some assets on the cheap, while buying some other more expensive assets, all to improve the product portfolio.
Trading at $130, shares have risen nearly ten percent since the end of 2023, but this comes amidst a continued hike in the guidance for 2024, as shares now trade at a similar 22-23 times earnings multiple, while leverage remains very modest and frankly the performance remains solid.
A Final Word
The truth is that ITT is seeing a decent 2024 so far after an already solid 2023. Moreover, the company keeps actively shuffling its portfolio, with divestment and investment activity improving the growth profile of the business.
With shares now trading at a similar 23 times multiple as we saw late in 2023, valuations remain stretched at a modest premium, which by now continues to be backed up by a solid underlying performance. However, a great risk-reward is not yet seen here, although I am impressed with the continued performance and keen to watch developments unfold from here.
