Now that Christmas is over, it's time for that other "most wonderful time... of the year" -- year-end earnings season, when those companies whose fiscal years align sensibly with the calendar version report their Q4 and full-year results. Next up is diversified industrial manufacturer ITT Industries (NYSE:ITT), which reports Friday morning.

What analysts say:

  • Buy, sell, or waffle? Seventeen analysts follow ITT. Ten of them rate the stock a buy, and seven a hold.
  • Revenues. On average, analysts expect 25% quarterly sales growth to $2.04 billion.
  • Earnings. Profits, however, are predicted to fall 7% to $0.67 per share.

What management says:
ITT gave investors a sneak peek at tomorrow's news a few weeks back, in a press release that both discussed 2006 and looked forward to 2007. Citing "continued organic growth in its core businesses, stronger operating performance and a more focused portfolio," CEO Steve Loranger predicted full-year 2006 earnings from continuing operations of $2.78 to $2.80 per share, inclusive of a one-time litigation charge of $0.13 after tax in the fourth quarter.

Looking forward to 2007, management predicts $8.3 billion to $8.4 billion in revenues, 50 to 70 basis points worth of operating margin improvement, $3.30-$3.38 per share in profits, and "strong free cash flow." Finally, marrying actions to those words, the firm also says it will deploy that cash flow to fund a 27% increase in its dividend this year, and to spend $1 billion over the next three years to buy back stock.

What management does:
There's little pattern to be discerned in ITT's recent margin trends. Although gross margins have been inching upwards over the last few quarters, operating and net margins have been following more of a one-step-forward, one-step-back sequence. Adding 50 to 70 basis points this year, however, would definitely give them an upward tilt.

Margins

6/05

9/05

12/05

3/06

6/06

9/06

Gross

24.3%

22.5%

27.4%

27.4%

27.6%

27.7%

Operating

10.6%

11.3%

10.7%

10.9%

11.0%

10.8%

Net

7.1%

8.4%

4.8%

5.3%

5.2%

4.5%
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Key to improving margins, it seems to me, will be controlling operating costs. Reviewing the numbers from the last couple of quarters, I see revenues climbing nicely at 13%, and cost of goods sold climbing a bit slower at 12% year over year. Where the margin trouble begins is in the firm's operating costs. There, we see selling, general, and administrative costs nearly doubling pace of sales growth at 24% year over year. More worrisome still, the one operating cost that doesn't seem to be leaving sales growth in its dust is research and development. The last two quarters have seen spending on R&D grow just 7% year over year.

But the news isn't all bad. Judging from the firm's working capital management, I find Loranger's prediction of strong free cash flow this year entirely credible. Over the last two quarters, neither accounts receivable nor inventories grew at anything near (3% and 4%, respectively) the rate of sales growth. ITT is collecting on its bills efficiently and not letting inventories pile up unsold. Investors tomorrow should be pleased that it merely maintains this good work on its balance sheet, because no improvement is necessary.

Competitors:

  • Calgon Carbon (NYSE:CCC)
  • DynCorp (NYSE:DCP)
  • Flowserve (NYSE:FLS)
  • Goodrich (NYSE:GR)
  • Harris Corp (NYSE:HRS)
  • L-3 Communications (NYSE:LLL)

For more on ITT, read: "ITT Offers Some Defense."

Fool contributor Rich Smith does not own shares of any company named above.