ITT Earnings: Exceptional Industrial Process Margins Drive Our 4% Fair Value Estimate Increase

Narrow-moat ITT ITT reported strong 2023 second-quarter results, as order volume and price continue to drive top-line growth. We raise our fair value estimate by 4% to $107 from $103, driven by time value of money and higher operating margins, primarily in the industrial process segment, though accelerated margin expansion in motion technologies also helps. Management raised the midpoint of its adjusted EPS range by 25 basis points. We still model near the top end of guidance with adjusted EPS of $5.10 and full-year organic sales growth north of 7%. We value ITT at 21 times adjusted EPS, relatively in line with the rest of the U.S. multi-industry category.

During the second quarter, consolidated revenue increased 14% year on year to $834 million, while adjusted segment operating margins increased 280 basis points to 18.7%. The industrial process segment, or IP, led the way, boasting more than 600 basis points of adjusted operating margin expansion on volume, price, and shop floor productivity. IP named a new leader in Fernando Roland, and we don’t think he’ll radically alter the successful playbook started by CEO Luca Savi. In fact, we expect additional productivity gains, since there are a handful of plants ITT still needs to overhaul. Furthermore, ITT will close its foundry, which, coupled with additional expected volume, leads us to believe IP will readily exceed 21% operating margins through the economic cycle. IP’s organic revenue grew 23% year on year, driven primarily by order volumes. Daily order rates in the aftermarket remained at historically high levels, and project orders grew over 100%, despite a very difficult prior-year comparison.

Motion Technologies, or MT, also improved significantly relative to its first-quarter sluggish performance from both a top-line and margin perspective. Its organic revenue grew approximately 10% year on year, and adjusted operating margins grew 150 basis points.