ITT Approves New $1 Billion Share Repurchase – Buyback Wednesdays

 

In the summer of 2022, I picked one of the hottest week of the year, with temperatures approaching 100 degrees Fahrenheit, to spend three days in Paris, France. We booked a guided tour of the Eiffel Tower and unfortunately I picked the tour that requires you to climb the steps to the top of the tower instead of riding the elevator up. As memorable as the tower was, having to trudge up countless flights of stairs in the heat was even more memorable. It turns out that the elevators that travel up and down the legs of the Eiffel Tower at an angle require custom, powerful shock absorbers that are designed by ITT engineers.

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ITT Inc. (ITT) produces specialty components for the aerospace, transportation, energy, and industrial markets. Initially named ITT Industries, Inc., the company was spun off from its parent company, the International Telephone & Telegraph (ITT), in 1996. In 2011, ITT Inc. separated its defense and water technology businesses, and in 2016, rebranded as ITT Inc.

Headquartered in Stamford, Connecticut, the company operates under three segments: Industrial Process (IP), Motion Technologies (MT), and Connect and Control Technologies (CCT). The Motion Technologies segment is the main driver of growth, contributing revenues of up to 50%, with a significant portion coming from Automotive. Motion Technologies achieved a 10% organic revenue increase in Q2 2023, primarily fueled by outperformance in the division that makes ceramic brake pads, which saw a nearly 500 basis point growth. The company secured contracts in 67 newly developed electrified vehicle platforms with leading automotive manufacturers such as Tesla, BYD, Porsche, Polisher, and BMW.

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Key Insights

·         ITT Inc. manufactures and distributes specialized industrial solutions and critical components across three segments: Motion Technologies, Industrial Process, and Connect & Control Technologies.

·         ITT has approximately 10,000 employees in more than 35 countries and serves customers in nearly 125 countries.

·         The company reported strong growth for Q2 2023, with a 13.7% YoY increase in revenue and over 40% growth in net income.

·         Organic orders growth rate has been accelerating since the start of the year and was up by 7% in Q1 and 13% in Q2.

·         The company has a large profitable backlog worth $1.1 billion, which follows a significant increase in revenue in H1 2023.

·         With a payout ratio of just 22.63%, there is room for dividend increases in the future.

·         The company’s recent announcement of a $1 billion share repurchase program is backed by strong cash flows and a favorable valuation.

In the summer of 2022, I picked one of the hottest week of the year, with temperatures approaching 100 degrees Fahrenheit, to spend three days in Paris, France. We booked a guided tour of the Eiffel Tower and unfortunately I picked the tour that requires you to climb the steps to the top of the tower instead of riding the elevator up. As memorable as the tower was, having to trudge up countless flights of stairs in the heat was even more memorable. It turns out that the elevators that travel up and down the legs of the Eiffel Tower at an angle require custom, powerful shock absorbers that are designed by ITT engineers.

ITT Inc. (ITT) produces specialty components for the aerospace, transportation, energy, and industrial markets. Initially named ITT Industries, Inc., the company was spun off from its parent company, the International Telephone & Telegraph (ITT), in 1996. In 2011, ITT Inc. separated its defense and water technology businesses, and in 2016, rebranded as ITT Inc.

Headquartered in Stamford, Connecticut, the company operates under three segments: Industrial Process (IP), Motion Technologies (MT), and Connect and Control Technologies (CCT). The Motion Technologies segment is the main driver of growth, contributing revenues of up to 50%, with a significant portion coming from Automotive. Motion Technologies achieved a 10% organic revenue increase in Q2 2023, primarily fueled by outperformance in the division that makes ceramic brake pads, which saw a nearly 500 basis point growth. The company secured contracts in 67 newly developed electrified vehicle platforms with leading automotive manufacturers such as Tesla, BYD, Porsche, Polisher, and BMW.

Valuation

ITT appears to be trading at a reasonable valuation, with a forward P/E of 20.06 and a forward EV/EBITDA of 12.42. The P/E ratio exceeds the sector median by a marginal 1.08%.

Share Repurchases

On October 4, 2023, ITT announced a new $1 billion share repurchase program with an indefinite term, representing around 12.6% of its market cap at announcement. Repurchases under this authorization will begin upon the expiration of the current $500 million authorization.

The company has retired around 6% of its outstanding shares since the inception of its $500 million program in 2019. It has reduced its outstanding share count from 88.7 million shares in June 2019 to 82.6 million shares in July 2023.

Dividends

Over the last five years, ITT has achieved a robust dividend growth rate of 16.43%. While the current forward dividend yield is a modest 1.17%, the potential for future EPS growth combined with the expansion of the current payout ratio of 22.63%, could pave the way for substantial dividend hikes in the foreseeable future.

Balance Sheet

ITT’s has a debt-free balance sheet. Given its penchant for acquisitions, goodwill on the balance sheet exceeds $1 billion. The company has $462.1 million in cash and short-term investments and net cash of $58.8 million as of July 2023.

Free cash flow has increased to $151.5 million for H1 2023 from $6.7 million in H1 2022. This is driven by higher operating income and improved inventory management. Free cash flow is expected to grow to nearly $400 million by the end of 2023.

Considering its substantial cash flows and a reasonable valuation, the company’s decision to initiate a $1 billion share repurchase program appears to be a prudent move.

Increasing Backlog

The backlog has been a really strong data point for ITT. Its backlog in the IP segment is almost $700 million. ITT has managed to increase its backlog in the IP segment by $50 million from Q1 to Q2 2023, even as it achieved nearly a 23% revenue growth in this segment.

In the CCT segment, there is a lot of backlog accumulation in commercial aerospace and defense. Backlog was up $25 million from Q1 to Q2, an increase of 11% year-over-year.

In the MT segment, backlog is mostly centered around rail and defense and the company has succeeded in accumulating some strong orders.

With this level of backlog and order acceleration, the company expects considerable revenue growth in 2024 in all its segments.

Outlook

With outperformance through the first half of the year, a large profitable backlog of more than $1.2 billion, and order acceleration, ITT has raised the midpoint of its full-year EPS guidance by $0.25 and is confident to deliver over $5 of EPS or 14% growth for the year.

Risks

The major risk the company might face is the inflation of raw materials and labor costs. Disruptions faced in the supply chain can prove to be another risk. Competition with aftermarket manufacturers causing pricing pressure and impacts margins. Another major concern is the post-retirement liabilities of $137.5 million on the company’s balance sheet.

With a debt-free balance sheet and robust cash flow that can facilitate further acquisitions, there is a potential risk of encountering execution challenges and the likelihood of overpaying for these acquisitions. Nevertheless, it’s worth acknowledging that the management has demonstrated competence in handling acquisitions thus far, resulting in the growth of both the company’s revenue and profitability.

Bottom Line

ITT has a great track record in identifying and integrating growth-accelerating acquisitions. The company’s management is focused on generating strong EPS growth and margin expansion. Lack of debt and strong cash flows position ITT well for future growth. Its substantial backlog of over $1 billion provides visibility into future revenue. The company has delivered back-to-back strong quarters this year, increasing both revenue and margins.

11 analysts have revised their earnings upwards for the company over the last 90 days. Despite the positive outlook, the valuation is still reasonable and the company should be a strong candidate for inclusion in a portfolio after further due diligence.