We currently maintained a Neutral recommendation on
Illinois Tool Works Inc.
) anticipating that the company would perform in line with the
market. Long-term opportunities remain compelling for the stock
but it is the near-term concerns that keep us on the sidelines.
Illinois Tool Works is one of the leading manufacturers of
industrial products and equipment. The company operates in seven
end markets across 57 countries. Decorative Surfaces segment was
divested in the fourth quarter as part of the company's strategic
initiative to grow through disposition of non-core business.
Besides, meaningful acquisitions also remain a preferred way for
expansion; the company spent roughly $730 million on acquisitions
for annualized acquired revenue of approximately $500 million in
Other strategic initiatives aimed at long-term growth include
Business Simplification and Strategic Sourcing. The first
strategy is expected to bring smaller revenue generation units
having common products or line of business under one roof while
the second initiative will enable the company to better manage
its raw materials and other costs.
For a period from 2012 to 2017, Illinois Tool Works anticipates
that organic growth would be about 200 basis points above
industrial production. Operating margins and return on invested
capital would be above 20% by 2017; while there would be 100%
free cash flow conversion and 12% earnings per share CAGR beyond
Notwithstanding these long-term aspects, we are concerned about
the company's near-term headwinds. Negative impacts from foreign
currency translation, which have reduced revenue by 2.7% in 2012,
still remain a nagging concern.
Even the company's fourth quarter results were disappointing.
Earnings per share of 89 cents in the quarter were a cent below
the Zacks Consensus Estimate. Revenue plummeted 2.3% year over
year due primarily to the divestiture of Decorative Surfaces
segment and negative foreign currency translation. Operating
margin fell 60 basis points.
Near-term concerns and fourth quarter 2012 results had an impact
on earnings estimates for the company. The Zacks Consensus
Estimate for 2013 has gone down by 2.1% to $4.29 (8 of 13
estimates were revised downwards) and for 2014 the estimate has
plummeted 1.4% to $4.81 (4 of the 13 estimates were lowered) in
the last 30 days.
Others Stocks to Consider
Other stocks to watch out for are
Altra Holdings, Inc.
Atlas Copco AB
), each holding a Zacks Rank #1 (Strong Buy).
ALTRA HOLDINGS (AIMC): Free Stock Analysis
(ATLKY): ETF Research Reports
ILL TOOL WORKS (ITW): Free Stock Analysis
METSO CORP -ADR (MXCYY): Free Stock Analysis
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