Investors continue to be tortured by seemingly conflicting forecasts over the direction of the Federal Reserve, Wall Street, interest rates, and the economy. If it will put your mind at ease, I will state unequivocally that no one can accurately predict the future of any of those four.
Moreover, you do not need esoteric conjectures to tell you the economy is expanding, or that the earnings of companies making up the S&P 500 index have likely increased by 22 percent on average in the second quarter.
At the same time, Wall Street is not an express elevator to riches and there will always be somebody trying to push a button for a lower floor. The myriad of supposedly necessary products will be like the Sirens in Greek mythology, luring you with enchanting forecasts only to have your portfolio crash on the rocky shoals of poor returns.
If you are tempted by what others are proselytizing, consider that the most comprehensive study on the topic of forecasting was conducted by Philip Tetlock. In his book “Expert Political Judgment,” he describes a study of 28,000 forecasts that were made by hundreds of experts in a variety of different fields.
According to Tetlock, not only was the performance of human forecasters distressingly closer to that of a chimpanzee, it was impossible to find any domain in which humans outperformed crude extrapolation algorithms, much less sophisticated statistical models.
A similar study was conducted of investment forecasts. The CXO Advisory Group gathered 6,582 predictions from 68 investment gurus made between 1998 and 2012. The average accuracy was 47 percent, a number that was worse than flipping a coin. Of the 68 gurus, 42 had achieved accuracy scores below 50 percent.
Do not let prognosticators be the driving force behind your investment decisions. Do your own research. Consider for example, Illinois Tool Works (ITW), a company that has been decimated by Wall Street since January.
The company manufactures and sells industrial products and equipment in seven key areas: Automotive OEM; Test & Measurement and Electronics; Food Equipment; Polymers & Fluids; Welding; Construction Products; and Specialty Products.
A year ago, when I wrote about ITW, my earnings estimate for 2017 was $6.40 per share with a 12-month projected share price of $155, yielding a 10 percent capital gain, plus an indicated dividend of 1.85 percent.
So how did the company do? Earnings came in at $6.59 and the shares recently closed at $138.06, although there was a drop of $10.60 after the its second quarter earnings release.
ITW posted second quarter earnings of $1.97 per share, a number that was less the Street’s expectation of $1.98 per share. For the same period a year ago, the company earned $1.66 per share, adjusted for non-recurring items, despite a $0.03 currency headwind.
Revenues for the quarter were $3.83 billion up 7 percent with an organic growth rate of 4 percent. Over the last four quarters, the company has surpassed consensus estimates on both earnings and revenues for three of those quarters.
The company’s shares have lost about 12 percent since the beginning of the year. Although the company has underperformed, the question is whether the downturn is an aberration or a trend.
For fiscal 2018, company is forecasting earnings of between $7.50 and $7.70 per share, with operating margins seen at 24-25 percent on revenues of $15.15 billion. The Street is looking for about $15.2 billion in revenues.
Given the company’s past performance, I lean towards giving ITW the benefit of the doubt, taking into consideration the issues of a strong dollar and the increased costs of doing business associated with the various tariffs that are or could soon be put in place.
The intrinsic value of the shares using a conservative free cash flow to the firm model produces an intrinsic value of $273 per share. My earnings estimate for this fiscal year is $7.78 per share with a 12-month projected share price of $168, yielding a 23.5 percent capital gain, plus there is an indicated dividend of 2.23 percent.
Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to www.RuddInternational.com.