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ITT is a steady growth stock

August 22, 2014 | About:
SRGALI

SRGALI

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Key Highlights:

Call: Buy ITT (ITT: NYSE).
Timeframe: 2 Years+.
Recent Price: $48.60.
Target Price: $83.05.
Strategy: Diversification.
Catalysts: Cash Flow

ITT is a diversified leading manufacturer of highly engineered critical components and customized technology solutions for the energy, transportation and industrial markets. In the last two years they have made strides to improve their business by focusing on Operational Excellence. ITT stock is undervalued even though it trades at 3.54x its current book value. ITT book value doubled from 2011 ($7.43) to 2013 ($13.20). ITT stock has intrinsic value of $83.05/share along with 42% margin of safety. I recommend a long position (2-3 years) for this company.

Opportunity

At Stiffel Industrial Conference 2014, ITT unveiled a Strategic Framework to increase Market Share, Customer Experience, Operational Excellence and Effective Capital Deployment.

  • ROIC for ITT is 52% (TTM), indicating that management is allocating capital appropriately. A high ROIC will enable ITT to invest in products and services that expand its moat and create barriers to entry of new competitors.
  • Net Margin for ITT is 19.58% (TTM), indicating that Operational Excellence initiative is increasing profit margins.
  • ROE is 54% (TTM), indicating that management is providing good shareholder return.

The above signs indicate that ITT is developing a wide moat around its core businesses while turning around the interconnect business.

Catalyst – Cash Flow & Global Diversification

ITT has improved its balance sheet in the last few years and generated substantial cash flow. ITT has no long term debt, a FCF of $104M (2013) and FCF/Share of $1.12, all positive signs that a company in the industrial sector has ability to grow both organically and through M&A as it will have capital independence. ITT has $1.1 billion in backlog as of 2013 providing management time to focus on M&A activity. Management’s emphasis on balanced growth in US and Emerging Market and overall increase in global foot print is good indicator of management’s strict discipline and effectiveness.

Valuation

ITT is trading at P/E ratio of 8.4, relatively cheaper compared to industry average of 20. ITT’s EPS (TTM) is a healthy 5.54. Except in 2012, ITT has positive earnings for the past 10 years indicating that management has been effective. ITT Peter Lynch Chart (Gurufocus.com) indicates that the stock is trailing below their earnings which are an opportunity to buy according to Peter Lynch.

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ITT has positive cash flow for 10 years trailing, an excellent sign, but the free cash flow dropped from a high of $996M (2012) to $110M (TTM), a sign that management need to put tighter reigns on current Cap Ex spending of $132M (TTM).

Summary

Some of the key metrics for a quality company are High ROIC, low leverage, high free cash flow generation and management effectiveness. ITT will be able to self-fund their own growth providing a catalyst for the stock to reach its fair value. ITT’s intrinsic value of $83.05 is calculated based on 10% average growth rate. ITT current stock price has 42% margin of safety signaling a Buy opportunity if the stock is held for a minimum of 2 years.

About the author:

SRGALI
I am an individual value investor seeking returns in value stocks over long term horizon. I am an Engineer by Profession and have an Executive MBA from Pepperdine University.

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