Acquiring Svanehøj And kSARIA Will Expand Market Share In Industrial Sectors

Key Takeaways

• ITT is transforming its portfolio with strategic acquisitions and divestitures, enhancing revenue, earnings, and market share through innovation.
  
• Operational efficiencies and strategic investments are driving growth in net margins and EPS, with recent acquisitions set to boost future earnings.
  
• Divestitures and acquisitions, geopolitical risks, and project backlogs pose challenges to ITT's revenue growth, profitability, and financial stability.

Catalysts

Manufactures and sells engineered critical components and customized technology solutions for the transportation, industrial, and energy markets in North America, Europe, Asia, the Middle East, Africa, and South America.

• ITT is strategically transforming its portfolio through divestitures and acquisitions, including acquiring companies like Svanehøj and kSARIA, which are expected to contribute significantly to revenue and earnings growth. (Impact on revenue and earnings)
  
• The company is achieving high growth in orders and backlog, up by 34% year-over-year, which is anticipated to positively influence future revenue streams significantly, particularly in industrial projects and connectors. (Impact on future revenue)
  
• ITT's strong focus on innovation, such as the introduction of the Embedded Motor Drive for industrial sectors, is likely to expand its market share and drive revenue and operating margin expansion, addressing global inefficiencies in motor operation. (Impact on revenue and operating margins)
  
• Structural improvements in pricing and operational efficiencies, coupled with productivity initiatives across various segments, like the Motion Technologies business, are key drivers expected to enhance net margins and operating income. (Impact on net margins and operating income)
  
• The company's active M&A strategy and sustained cash flow generation enable further investment in high-growth and high-margin segments, driving overall EPS growth. Contributions from recent acquisitions are expected to become significantly accretive to earnings from 2025. (Impact on EPS)

ITT Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming ITT's revenue will grow by 4.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 14.3% today to 14.7% in 3 years time.
• Analysts expect earnings to reach $614.0 million (and earnings per share of $7.64) by about March 2028, up from $518.4 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 26.9x on those 2028 earnings, up from 21.8x today. This future PE is greater than the current PE for the US Machinery industry at 22.1x.
• Analysts expect the number of shares outstanding to decline by 1.09% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.29%, as per the Simply Wall St company report.

ITT Future Earnings Per Share Growth

Risks

• The divestiture of Walgreen resulted in a significant loss of revenue and income, impacting overall earnings and slowing EPS growth as the company adjusts to its new portfolio, potentially affecting net margins.
  
• The acquisitions of Svanehøj and kSARIA come with higher interest expenses and temporary amortization impacts, which constrain immediate profitability and EPS in 2024 and 2025.
  
• The potential impact of geopolitical risks, such as tariffs, on ITT’s operations in Mexico, could disrupt supply chains and affect operating margins and revenues, particularly in the Motion Technologies and Connect & Control Technologies segments.
  
• The current backlog mix has shifted towards a greater proportion of long-term projects, which may delay revenue recognition and short-cycle earnings, impacting the immediacy of revenue growth and cash flow.
  
• The dependence on key customers, such as Boeing, for significant portions of the Connect & Control Technologies revenue exposes the company to risk if anticipated production ramps or recoveries are delayed, affecting revenue stability and growth prospects.

Valuation

• The analysts have a consensus price target of $171.364 for ITT based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $186.0, and the most bearish reporting a price target of just $141.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $4.2 billion, earnings will come to $614.0 million, and it would be trading on a PE ratio of 26.9x, assuming you use a discount rate of 7.3%.
  
• Given the current share price of $138.69, the analyst price target of $171.36 is 19.1% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.