ITT Inc.

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 4/5

ITT Inc. is a diversified manufacturer of highly engineered critical components and customized technology solutions for the transportation, industrial, and energy markets, with a global presence and a focus on innovation and sustainability.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

ITT’s moat is rated 2/5 due to its niche positioning within multiple industries, reliance on technological expertise, and strong customer relationships. However, it does not possess the strongest durability because of the ease of competition in some segments and reliance on customer spending.

Business Overview:

ITT operates through three main segments:

  1. Motion Technologies (MT):
    • Produces components for passenger and commercial vehicles, with a focus on brake pads, shock absorbers, and damping technologies.
    • Serves the automotive, commercial transportation, and railway sectors.
    • Recent growth is driven by higher sales in automotive markets, offset slightly by slowing OE and aftermarket sales in the aerospace industry.
  2. Industrial Process (IP):
    • Provides engineered industrial pumps, process optimization, and monitoring & control systems for energy, chemical, and general industrial markets.
    • Serves the chemical, mining, paper, and food processing, and beverage sectors.
    • Saw some decline in Q3 of 2023 which was made up for due to their growth in the chemical industry as demand remained strong from the energy and industrial markets.
  3. Connect & Control Technologies (CCT):
    • Supplies highly engineered connectors, sensors and switches for the industrial, energy, aerospace, and medical markets, with recent growth in transportation solutions.
    • Provides power delivery technologies, for the industrial and energy markets.
    • During Q3 2023, bookings and revenue both improved due to the company’s backlog

Industry Trends and Competitive Landscape:

  • Transportation and Industrial: These industries are cyclical, experiencing growth and decline with macroeconomic conditions. Competition stems from both local and international players, with constant pressure on costs, pricing, and performance.
  • Energy: This is a growth area for ITT as they offer products and systems that increase efficiency. However, it is subjected to strong commodity prices and changing regulations.
  • Technological advancements: The need to integrate tech with their systems creates new opportunities for growth, while the development costs and the ability to stay competitive become a challenge.

In Q3 2023, ITT experienced supply chain disruptions due to the ongoing Russia-Ukraine war which has led to increased prices, disruptions in delivery timelines, and labor shortages. ITT has taken measures to manage these risks.

What Makes ITT Different?:

  • ITT has many years of experience and strong relationships with customers. They focus on engineering expertise.
  • The company’s diverse product lines across various industries help offset potential cyclical impacts and ensure more stable growth.
  • ITT is a global leader in many of their markets, including in engineered solutions for aerospace, transportation, industrial and energy markets.

The core values of ITT are safety, integrity, innovation, and responsibility. These values are supported by a commitment to sustainability, inclusion, diversity, and long-term value creation.

Financial Performance (Analysis based on latest reports):

  • Revenue Growth: Reported strong revenue growth in Q3 2023, with total sales increasing 10.1% from the prior year.
    • Motion Technologies and Industrial Process segments are driving growth, with the Connect and Control Technologies segment remaining consistent with prior performance.
    • On an organic basis, total revenues increased by 7.3%. This is partially due to increased volumes in the motion technologies segment and improved pricing and volumes in the industrial process segment.
    • Organic growth in the Connect & Control technologies segment was only slightly positive at 0.5%.
  • Profitability: Experienced a strong performance across their segments in Q3 2023, with improvements to profit margins. Adjusted operating income for the third quarter was $343 million, a 17.4% year over year increase.
    • Reported a strong increase in their net income from continuing operations which increased 35.5% year-over-year.
    • Free cash flow from their ongoing operations for Q3 2023 was -$142 million, which was down from prior year performance, however was noted to be due to the timing of investment expenditures.

    • Management noted that supply chain costs have improved, while inflation has continued to increase, but at lower levels.

    • Overall, margins are expected to remain stable or improve in coming periods, but this will also depend on their ability to maintain high prices and not increase operating expenses substantially.
  • Earnings: Earnings per share (EPS) from continuing operations for the quarter increased significantly to $1.67, which is a 22.1% increase from last year’s earnings. However, adjusted earnings per share (EPS) increased 11.6% year-over-year.

Balance Sheet Health:

ITT’s balance sheet is relatively healthy and given a rating of 4/5. While their financial leverage is not low, they are able to create value with a reasonable cost of capital.

  • Liquidity: ITT maintains a good liquidity position with a good amount of cash and marketable securities. It also utilizes credit facilities, which provide additional access to funding if necessary.
  • Debt: ITT’s debt levels are generally stable, with a mixture of both short-term and long-term debt. They continue to reduce their debt load and expect to reach a debt-to-EBITDA ratio of 1.5 by the end of 2024.
  • Equity: The company’s shareholder equity also remains stable and positive.

  • They have generated positive operating cash flows.

    • The company has been repurchasing shares to reduce dilution, but given low amounts, it is not expected to increase share prices.
  • Overall, a company’s financial health is determined by many factors that cannot be summed up in a single value. But ITT appears to have managed their balance sheet well and has a reasonably healthy business overall.

Moat Analysis:

ITT’s moat, or competitive advantage, can be categorized as:

  1. Intangible Assets:
    • ITT possesses some strong brands for some of its product offerings. However, reliance on a brand alone is insufficient for a wide moat, as brand recognition is not difficult to achieve in most of ITT’s markets.
    • ITT has some patents across multiple segments, however these are typically limited in their duration, and their ability to protect long-term profitability is limited.
    • ITT does have a decent amount of regulatory approval in specific segments, especially for defense contracts, which gives them an advantage in pricing.
  2. Switching Costs:
    • ITT’s products can have high integration costs in a client’s business. This tight integration can help create switching costs, but the benefits they bring aren’t always higher than the costs of switching.
    • These switching costs help create longer client relationships and thus a slightly lower rate of turnover.
  3. Network Economics:
    • ITT doesn’t directly benefit from network economics. However, they have a complex interconnected network of customers and vendors that it has built over many years. This network is a source of advantage for them.
  4. Cost advantages:
    • ITT has some slight cost advantages derived from economies of scale due to their size, and from being able to control production costs.
    • However these cost advantages are not that sustainable due to multiple competitors in the industry.

Legitimate Risks to Moat and Business Resilience:

  • Cyclical Industries: ITT operates in cyclical industries, making it vulnerable to macroeconomic fluctuations. Periods of economic downturns can reduce sales volume in all segments.
    • The automotive industry, which the motion technologies segment relies on, has a history of sharp declines, which can directly translate to a decline in performance of the business.
    • The energy and industrial industries, which the industrial processes segment is strongly tied to, can also experience downturns due to market forces and pricing volatility.
  • Supply Chain Disruptions: ITT’s global operations and heavy reliance on international supply chains leave it exposed to disruptions, potentially affecting production and increasing costs.
  • Competition: Despite their presence in niche markets, they face intense competition from both global and local players, particularly in the components segments. This pressure may lead to commoditization of their services and reduce their pricing power.
  • Technological Disruption: Rapid technological advancements may quickly erode the value and relevance of ITT’s products, making them less competitive against competitors. Thus, continued investment in R&D is necessary.
  • Integration Risk The numerous acquisitions made by the company, like MicroMode Products, and Habermann GmbH might also expose the company to integration risk, and operational issues.

Management’s Perspective on these Risks and Latest Developments:

  • The management noted the various economic and macroeconomic issues in earnings calls but stated that they are managing these risks by adjusting pricing and focusing on operational efficiency.
  • They have indicated that their supply chain issues are easing in 2023.
  • Their strategy to use acquisitions to pursue higher growth and increased profitability continues to be a core value of their business model.

ITT’s strategy to allocate resources to the most efficient and high-performing segments, including those with high-growth potential helps to create long-term value.

Understandability Rating:

Given a rating of 2/5.

  • ITT’s business is complex, with its multi-faceted operations across numerous industries, making it more difficult for the general investor to understand its economics.
    • The company’s financials are complex due to the adjustments that it is making to them. A complete understanding of what management is considering relevant for financial reporting purposes is difficult to grasp.
    • The interplay of how ITT manages so many different parts is also difficult to conceptualize.
  • ITT’s products are also not something the general investor would typically use or encounter in their day-to-day lives.
  • However, its diversified nature also allows for its products to be understood separately which allows for a more concrete analysis of its business segments.