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In today’s highly competitive and volatile markets, certain industries present unique opportunities, marked by their capability to provide highly specialized, engineered solutions across various sectors. Consider an industry that engineers solutions not just for one, but for diverse areas such as aerospace, rail, auto, and power generation, among others.
Companies in this industry deliver critical specs to aircraft pilots, provide charging solutions for electric vehicles, stream data for mission-critical defense applications, deliver customized energy absorption components for vehicles, provide pumping solutions for chemical, food and beverage, oil and gas and medical and pharmaceutical applications, engineer shock absorption and vibration isolation solutions protecting structures from seismic events and preventing mechanical shock in heavy industry, and supply many more technologies that enhance safety, durability and performance in a myriad of industries.
Ideally, an investment-worthy engineering solutions company should exhibit diversification across business verticals and geographies, and an unwavering commitment to innovation. A robust R&D pipeline, indicated by an impressive patent portfolio, often underscores a company’s ability to stay ahead of its competitors. Moreover, a track record of strategic acquisitions indicates adaptability and an aim to constantly evolve.
Additionally, key indicators like low debt-to-equity ratios, impressive profitability metrics, and a credit rating that speaks to stability and trust are instrumental. Add to this a consistent record of beating earnings expectations, and you have a company that doesn’t just survive but thrives. Investors should not overlook the value of shareholder returns, and a track record of healthy dividends, combined with strategic stock buybacks, rounds out the characteristics of a potentially profitable investment.
We will present such a company, but first, let us delve into a short update on the economy and markets, and the Smart Investor calendar.
Economy and Markets: Looking Forward
There are several important reports scheduled to be published in the next few days.
- Later today, we will receive August’s Building Permits and Housing Starts reports, which provide valuable insights into the health of the housing market, as well as the economy overall, since the housing demand correlates with economic growth and consumer sentiment. Both reports are leading indicators, used by economists and analysts, among other data, to measure current demand and to estimate near-term trends in real estate, as well as in the connected industries.
- On Thursday, several Federal Reserve members, including Fed Chair Jerome Powell, will speak in New York, presenting their views on the economy and the outlook for monetary policy. Investors will closely watch the policymakers’ comments, as this is their last public statement this month before the U.S. central bank enters a blackout period ahead of its next interest-rate decision meeting.
- Next Tuesday, we will receive the preliminary October’s S&P Global Manufacturing and Services PMI reports, which measure business conditions in the manufacturing and services sectors, two main sectors of the U.S. economy directly affecting economic growth. PMI indices are leading economic indicators used by economists and analysts to gain timely insights into changing economic conditions since the direction and rate of change in the PMIs usually precede changes in the overall economy.
As for the stock calendar, the Q3 2023 earnings season for Smart Investor Portfolio companies is in full swing, with many earnings reports scheduled for the next several days. The reporting companies this week are Taiwan Semiconductor (TSM), General Electric (GE), Archer Daniels Midland (ADM), General Dynamics (GD), Molina Healthcare (MOH), Amphenol (APH), Teledyne Technologies (TDY), and Everest Group (EG).
There are no ex-dividend dates for Smart Investor Portfolio companies scheduled for the next week.
Today, we are adding the stock of a global multi-industry leader in high-technology engineering. The company we are adding has been growing earnings at a fast clip, and its long-term prospects are outstanding.
To make room for this valuable addition, we are letting go of a great and very promising business, whose stock has been caught in a negative-news whirlpool which has strongly pulled it down in the past two months.
New Addition: ITT Inc. (ITT)
ITT Inc. is a global multi-industry leader in high-technology engineering and manufacturing projects. The company manufactures and sells engineered components and customized technology solutions for numerous key industries. ITT provides highly engineered and customized solutions to customers in Aerospace, Auto and heavy Vehicle, Chemical, Defense, Food & Beverage, Industrial, Infrastructure, Medical and Pharmaceutical, Mining, Oil & Gas, Power Generation, Rail, and other industries.
ITT’s extremely wide product & solution suite includes three segments: Motion Technologies (such as brake components and specialized sealing solutions, shock absorbers and damping technologies); Industrial Process (such as industrial pumps, valves, and plant optimization and remote monitoring systems and services); and Connect and Control Technologies (such as harsh-environment connector solutions and critical energy absorption and flow control components).
The company was established in 1920 as International Telephone & Telegraph company. During the 60s and 70s, ITT acquired more than 350 companies from various sectors, becoming a global conglomerate; the rapid expansion led to a 20-fold growth in revenue, but saddled the company with enormous amount of debt. In the 80s, the company began the process of selling many of the businesses it acquired earlier. In 1995, ITT split into three separate, independent companies: ITT Corporation, which was focused on the hotel and gaming businesses; ITT Hartford, which became a stand-alone insurance operation; and ITT Industries, which started as a collection of manufacturing companies. A decade later, ITT Corporation had been acquired, ITT Hartford had changed its name, and ITT Industries continued its transformation, which included changing its name back to ITT Corporation in 2006. In 2011, ITT Corporation (previously ITT Industries) separated into three independent publicly traded companies, spinning off its water and defense-related businesses. In 2016, ITT Corporation became ITT Inc., a global industrial solutions provider.
Today, ITT Inc. is a mid-cap Industrial sector company with a market capitalization of $8.3 billion, annual revenues of $3 billion, and a workforce of approximately 10,000 employees. The company is headquartered in Stamford, Connecticut, with 49 manufacturing facilities and 100 service offices in more than 35 countries, which help its customers from 125 different countries.
ITT Inc. is an exceptionally diversified company in terms of businesses, end markets, and geography. Business-wise, the company derives 46% of its revenue from Motion Technologies, 32% from Industrial Process, and 22% from Connect & Control Technologies. In terms of end-market industries, ITT derives 40% of revenue from automotive market, 26% from chemical and industrial pumps, 10% from general industrial companies, while the rest is split between aerospace, defense, rail, and energy markets. Over 30% of the annual revenue is derived from aftermarket services to existing clients. Geographically, North America is responsible for 41% of total revenue, Europe – for 33%, Asia and pacific – for 18%, and the rest is derived from other locations.
ITT invests heavily in research & development (R&D); the company holds over 1,500 active U.S. patents. In addition to organic growth, led by innovation, the company has been expanding through acquisitions. Its latest purchase was in May 2023, when it acquired privately held Micro-Mode Products, Inc., a specialty designer and manufacturer of high-bandwidth radio frequency connectors for harsh environment defense and space applications, for $80 million. Prior to that, in 2022, ITT acquired privately-held Habonim, an Israeli-based manufacturer of ball valves and actuation technologies for harsh applications, for $140 million in an all-cash transaction.
Despite the R&D investment and the acquisitions, ITT’s financial health is excellent. The company has a very low debt-to-equity ratio of 17% and more cash than its total debt. With a quick ratio of 1.1 and a current ratio of 1.6 indicate a very healthy level of liquidity. ITT’s profitability metrics are also robust. Return on Equity (ROE) of 19.6% may seem mediocre, however, it compares favorably with the average of 15.5% for its industry. Its Return on Assets (ROA) of 11.5% is also much higher than the industry’s average of 6.7%. The company’s industry-beating profitability is also reflected in its operating margin of 17% and net profit margin of 13.5%, which are much higher than the averages in its industry.
The company’s strong financial position is underscored by its high credit rating, “BBB+“ at Fitch Ratings. According to Fitch, “The ratings for ITT reflect the company’s solid EBITDA margins, product and geographic diversification, large installed base, sizeable aftermarket revenue, good financial flexibility and conservative capital structure. ITT’s businesses are cyclical in nature, but the timing of cycles within the automotive, industrial and natural resource end markets can vary, softening the impact of cyclicality on the company’s consolidated results.”
In August, ITT Inc. reported another strong quarter, with EPS and revenues exceeding expectations by a wide margin. The company has beaten analysts’ EPS projections in all quarters when these projections were available. Q2 2023 was the fourth consecutive quarter of double-digit earnings-per-share growth, which rose 36% year-on-year after increasing 21% in the previous quarter. Revenues rose 14% year-over-year, after increasing by 10% in Q1. In Q2, operating income rose 42%, while net income surged 45% year-on-year. Operating cash flow for the second quarter of $140 million increased $83 million versus the prior year, primarily driven by higher operating income and improved working capital management. Free cash flow for the quarter of $122 million increased $83 million. On a year-to-date basis, ITT generated free cash flow of $152 million, up $145 million versus 2022. Following these outstanding quarterly results, ITT lifted its full-year 2023 operating margin and EPS guidance.
ITT’s robust finances, successful delivery, and strong earnings growth have been reflected in the stock’s outperformance. The company’s stock has brought its investors an outsized gain of 56% in the past three years, compared to the S&P 500’s increase of 25%. In the past 12 months, the stock has risen by 45%, while the SPX gained 19%.
Despite the great performance, ITT’s stock remains modestly valued compared to its peers in the industry. The stock is now trading at a TTM P/E of 19.4 Forward P/E of 18.7, in line with the sector averages and lower than the average valuations of its peers in the industry.
Notably, in addition to the stock price appreciation, ITT Inc. rewards its shareholders through dividends and buybacks. These are an integral part of the company’s capital deployment strategy.
Although its current dividend yield of 1.2% is lower than the average for the Industrials sector, the company has been growing its cash payouts for 12 years and is expected to continue doing so for years to come. This outlook is supported by the company’s strong profitability metrics, stellar balance sheet, and low payout ratio of 22.7%. The latest dividend increase was in March 2023; in the past five years, payouts rose at a CAGR of 16%.
As for the buybacks, the company has been repurchasing its shares on an opportunistic basis under various programs. In October 2023, the company also announced that its Board of Directors approved a $1 billion share repurchase authorization with an indefinite term. Repurchases under this authorization will begin upon the expiration of the current $500 million authorization.
TipRanks-scored top analysts foresee an average upside of 11% for the stock in the next 12 months. ITT carries a 9/10 (“Outperform”) Smart Score rating on TipRanks with a “Strong Buy” recommendation:
To conclude, we view ITT Inc. as a winning combination of quality and growth. Its stellar finances, outstanding earnings growth, solid execution of strategy, bright outlook, and strong alignment with shareholder interests, make it a valuable addition to the Smart Investor portfolio.
New Deletion: InMode (INMD)
InMode Ltd. designs, develops, manufactures, and markets minimally invasive aesthetic medical products for various health and aesthetic procedures, based on its proprietary radiofrequency-assisted lipolysis and deep subdermal fractional radiofrequency technologies.
The company also offers non-invasive medical devices that target an array of health, aesthetics, and muscle procedures. In simple words, the company develops and markets innovative medical devices harnessing novel radio frequency technology for cosmetic procedures and body treatments.
InMode is a great company with zero debt, robust profit margins, strong capital efficiency metrics, outstanding earnings growth, and a bright long-term outlook. However, since July, the company’s shares have been caught in a negative whirlpool that has pulled them down by over 50% in just two months.
In July, the company reported blockbuster results for its fiscal Q2 2023, with record revenue and EPS results. However, given that the stock reached its post-pandemic peak in the beginning of that month, and the market’s overall nervousness, it was due for some correction and profit-taking.
Against that background, the management’s softer outlook for the third quarter and the full year, expected due to the macroeconomic headwinds that are leading to buyers’ financing bottlenecks and tightening leasing standards, provided a strong negative catalyst that sparked a sell-off. A rating downgrade by Canaccord Genuity and stock price target cuts by Jefferies and Baird added fuel to the fire, and the stock suffered heavy losses.
The company’s stock is a typical long-duration equity, i.e., most of its value is expected to be generated in the future. For this reason, the company’s valuation is more sensitive to changes in Treasury yields, which show no sign of a possible decline in the current rate environment. In addition, the current market mood is very punishing for volatile small-cap stocks; INMD stock price is still facing strong bearish pressures.
We believe that InMode, a strong and well-managed company with great product suite, will eventually overcome these negative pressures, and we may well reevaluate INMD for reentrance into the Smart Investor portfolio in the future. But at the moment we believe that it is appropriate to sell the stock.
Charter Members of the 30% Winners Club
*The 30% Winners Club includes stocks from the Smart Investor Portfolio that have risen at least 30% since their purchase dates.
Despite the stock market’s fluctuations in the past week, our exclusive club’s ranks have remained unchanged, still including five stocks: GE, TECK, AVGO, ORCL, and CDW.
The first-in-line to reenter the Winners Club is now ANET, with a 29% gain since purchase. Will it be able to close this minute gap, or will someone else outrun it to the finish line?
What’s Next?
Our next commentary will come out on Wednesday, October 25th, before the market opens.
Until then – we wish you a world of investment success!
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Disclaimer
The information contained in this article represents the views and opinions of the writer only, and not the views or opinions of TipRanks or its affiliates and should be considered for informational purposes only. TipRanks makes no warranties about the completeness, accuracy, or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. TipRanks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by TipRanks or its affiliates. Past performance is not indicative of future results, prices, or performance.
