Illinois Tool Hammered by Downgrade

A penny beat by Illinois Tool Works got a poor reception from Wall Street on Tuesday, knocking the stock down more than 5%.
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) -- A penny beat by

Illinois Tool Works

(ITW) - Get Report

got a poor reception from Wall Street on Tuesday, knocking the stock down more than 5%.

Deutsche Bank downgraded the stock to hold from buy following the company's third-quarter report, saying the performance wasn't good enough to support the stock's valuation. The firm trimmed its 12-month price target to $54 from $59 as well, referring to its call as a "pre-emptive action."

Before the opening bell, Illinois Tool Works reported a third-quarter profit of $419.3 million, or 83 cents a share, up from a year-ago profit of $302.4 million, or 60 cents a share, and a penny ahead of the average estimate of analysts polled by

Thomson Reuters

. Revenue came in at $4.02 billion in the latest three months, up 12.2% from a year-ago total of $3.58 billion, and roughly in line with Wall Street's consensus view.

The stock lost $2.70 to $46.48 on volume of 10.4 million, more than double its trailing three-month daily average of around 4.3 million. Year-to-date, the shares are up only 2.5% but they had bounced back significantly since plumbing a 52-week low of $40.33 on August 25, a move that featured prominently in Deutsche Bank's call.

"ITW has enjoyed a 15% rally in the last 3m, and this has substantially narrowed its valuation discount with the group," the firm said, adding later that it "no longer see

s an attractive risk/reward vs. our revised $54 target price."

Deutsche Bank also found fault with the results in the third quarter, saying that while the Glenview, Ill.-based maker of a variety of industrial products did meet its estimate for earnings of 83 cents a share, its operating net income of $641 million wasn't quite up to snuff.

"We were particularly concerned by weak margins within Transport (14.9% vs. 16% DBe

Deutsche Bank estimate) and Construction (11.8% vs. 14.5%)," the firm said. "Management increased FY11 guidance to $2.99-$3.07

per share but this implies 4Q of 74-82c, providing no upside to the high end of the prior 69-83c range."

The tightness of the company's outlook looks like evidence of a troubling trend as far as Deutsche Bank is concerned.

"The concern here is that ITW is showing very little operating leverage with earnings in the low-80s from 2Q10 to 4Q10E, implying an annualized outcome in the $3.30

per share range for FY11," the firm said. "With production flattening and with lead indicators turning down, there could be some downside to FY11 numbers, given ITW's general macro sensitivity."

The current average estimate of analysts polled by

Thomson Reuters

is for a profit of $3.61 a share from Illinois Tool Works in fiscal 2011.

Wall Street sentiment on the stock was pretty positive headed into the report. Of the 22 analysts covering the company, 16 were at either strong buy (8) or buy (8) with the remainder at hold (6).

It'll be interesting to see if other firms follow Deutsche Bank's lead and join the ranks of the skeptical, or if the rest of the bulls stick with their view, given how flat the company's top-line growth may shape up to be.


Written by Michael Baron in New York.

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