We wanted to share with you a recent report from our AFG 50 model portfolio.
ITT (NYSE: ITT) Investment Summary: ITT reported an 11% decline in Q2 09 adjusted earnings from continuing operations of $196 million, or $1.06 per share, and 9% lower sales of $2.78 billion. The results exceeded analysts’ estimates of $0.80 EPS and $2.7 billion in sales. The earnings outperformance was mostly due to aggressive cost-cutting initiatives within the company’s Fluid Technologies segment and strong demand for high-margin businesses in the Defense Electronics segment.
ITT is slightly more optimistic about H2 09 within some of its businesses, compared to its rather bleak assessment in the prior quarter’s conference call. Within Fluid Technologies, the residential water business has shown signs of stability. However, offsetting the improvement in residential, the commercial water business continued to deteriorate faster than expected. ITT continues to realign businesses within Fluid Technologies to look for cost savings. The Motion & Flow Control segment will benefit from new business won for major automotive companies such as BMW, Daimler, and the Ford Taurus program. Working to somewhat offset the improvement in automotive is the continued pressure in the aerospace market, including the recent Boeing 787 delay. The recurring bright spot in ITT’s business continues to be its Defense Electronics segment, as orders increased double digits due to global positioning systems (GPS) and environmental satellite programs. Also, the company’s dominant position in CREW jamming systems, night vision goggles, and SINCGARS radios provides recurring sales for highly prized technology utilized in U.S. and international military applications. ITT continues to restructure all three segments and raised the expected 2009 restructuring charge to $80 million, up from the previously guided $65 -$70 million.
Given the slightly better outlook in ITT’s non-defense segments, management raised its full-year adjusted EPS guidance to $3.50 -$3.70, up from $3.20 -$3.60 previously guided. Total company sales are expected to decline 6% -7%, compared to 2008, slightly better the previous guidance of 6% -9% lower sales. We reiterate our Buy recommendation for ITT and continue to hold it in the AFG 50 Portfolio. Our updated model suggests a target price of $58 or 19% upside.
