Illinois Tool's Great Job Isn't Good Enough for Investors Illinois Tool Works

Illinois Tool's Great Job Isn't Good Enough for Investors

Although third-quarter results were slightly better than estimates, the stock fell anyway.

Even great news isn't good enough for industrial companies this earnings season.

Illinois Tool Works -- a $40 billion maker of construction products, car components and and restaurant food equipment -- actually raised the midpoint of its 2016 guidance on Thursday after reporting third-quarter results that were slightly better than analysts' estimates. The bump amounted to just a penny, but that still counts for something at a time when many industrial companies are going all Edward Scissorhands on their forecasts (sorry, it's almost Halloween).

The problem was that analysts had been calling for -- and investors had been anticipating -- an even better earnings outlook. So the stock  fell as much as 3.4 percent in its worst intraday slide since June. 

Illinois Tool is one of just a few industrial companies that are both improving margins and finding ways to grow sales organically. The profitability gains are all the more impressive because Illinois Tool already commanded some of the highest margins in its peer group. That status has made it one of the best-performing stocks in the sector over the past year, but it's also made the company a victim of high expectations. There are worse problems to have, but it means that boosting the share price further is going to require more than just meeting goals. 

The same thing happened earlier this week to air-conditioner and heater maker Lennox International. Essentially everything about the company's third quarter surpassed analysts' expectations -- from earnings per share to revenue to margins -- leading it to raise its adjusted EPS guidance for the full year by 15 cents at the mid-point. It even had nice things to say about 2017. But investors already thought good news was coming so a buy-the-expectation, sell-the-news mentality took over. Lennox has declined about 6 percent so far this week.

The reality of pricing industrial stocks to perfection is that even the companies that do what they're supposed to get punished come earnings day.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

 

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