ITT Could Stage Coup as Orders Come Through

01/10/2011 12:35 pm EST

Focus: STOCKS

Taesik Yoon

Editor, Forbes Investor and Forbes Special Situation Survey

The engineering company’s recent revenue lull belies strong gains in its defense division’s backlog, writes Taesik Yoon of Forbes Growth Investor.  

Investors were recently disappointed by the lack of revenue growth at ITT Corp. (NYSE: ITT), a diversified engineering concern that lagged the Standard & Poor’s 500 index last year.

Third-quarter revenue was flat from the prior year at $2.64 billion. Strong growth of 11% and 17% in the Fluid Technology and Motion Flow & Control businesses, respectively, was offset by a 9% decline in Defense & Information Solutions.

Indeed, current guidance for 2010 implies a 1% decline in fourth-quarter revenue from the prior year. Additionally, ITT is still exposed to lingering asbestos-related liabilities. Increases in this liability have reduced reported profits in prior periods, including the most recent quarter.

We expect organic revenue growth to rebound nicely in the fourth-quarter thanks to recent strong order activity. ITT booked total orders of $2.83 billion in the third quarter, up 19.9% year-over-year. Organic orders were up 13.5% and 14.9% in the Fluids Technology and Motion Flow & Control segments, respectively. But we were most encouraged by the rebounding order activity in the Defense segment, which was up 25.3%.

Profits should see an even bigger boost. The company raised its full-year earnings guidance to $4.28 to $4.32 per share. At the mid-point, this implies fourth-quarter earnings growth of 29% from 2009 to $1.25 per share.

When taking into consideration unfunded awards, ITT’s total backlog was actually closer to $10 billion at the end of the third quarter. This figure also does not include $4.8 billion in contracts originally awarded to ITT that are currently being protested by rival contractors. One of these awards (to provide communications and tracking services networks for Earth-orbiting aircraft worth $1.26 billion) has already been released. Additional releases would significantly boost backlog.

Furthermore, investments made in emerging markets, where sales grew 22% in the third quarter, should continue resulting in strong growth over the next several years. Guidance for 2011, provided on Dec. 17, suggests as much. Revenue is expected to climb 3% to 5% from the current 2010 estimate, while earnings should be up about 10% to a range of $4.62 to $4.82 per share.

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