We recently maintained our Neutral recommendation on
Illinois Tool Works Inc.
). We expect the company to perform in line with the broader
Illinois Tool Works is one of the leading manufacturers of
industrial products and equipments. The company provided a solid
year-to-date return of 27.1% and is expected to boost earnings by
9.3% in the next 5 years.
Having said that, development of new and improved products as
well as broadening the application of established products is
becoming increasingly difficult for Illinois Tool Works in a
growing competitive environment. Also, the company's complex and
fragmented business structure is proving to be an obstacle to
growth. To combat this situation and to ensure maximum leverage
from its core capabilities, Illinois Tool Works adopted a
long-term Enterprise Strategy (2012-2017) in 2012.
The long-term Enterprise Strategy includes Business
Simplification, Strategic Sourcing and Portfolio Management. In
the fourth quarter 2013, these initiatives contributed roughly
110 basis points to Illinois Tool Works' operating margin
improvement. Cost savings in the range of $600-$800 million are
expected from business structure simplification and strategic
sourcing strategies. By the end of 2014, the company aims at
divesting roughly 25% of 2011 revenue.
Also, Illinois Tool Works follows a consistent policy of
returning value to its shareholders via dividend payments and
share buybacks. In 2013, roughly $700 million was paid as
dividends and $2.2 billion used for share buybacks while roughly
$700 million and $1.8 billion are expected to be used for
dividend payments and share buybacks in 2014. Spending on
acquisitions is expected to be $375 million.
A brief snapshot of Illinois Tool Works' fourth quarter 2013
results has been provided below.
Earnings per share in the quarter were 92 cents, up 41.5% year
over year and above the Zacks Consensus Estimate of 91 cents.
Revenue grew 4.8% driven by solid performances in North America,
China, Australia and New Zealand. Segmental performance was
impressive, except for the revenue decline in Polymers &
Fluids and Construction Products segments. Operating margin
expanded 260 basis points, aided by a 110 basis point
contribution from Enterprise Strategic initiatives.
For 2014, earnings per share are predicted to be within
$4.30-$4.50 range and revenue growth is expected in a band of
2%-4%, including organic growth of 2%-3%. The Zacks
Consensus Estimate for 2014 stands at $4.46 and
is at -0.22%. The company's share price has fallen 2.8% since the
earnings release on Jan 28, 2014.
Stocks to Consider
Illinois Tool Works currently has a $33.6 billion market
capitalization and carries a Zacks Rank #3 (Hold). Some
better-ranked stocks in the industry include
Altra Industrial Motion Corp.
Barnes Group Inc.
). All these companies hold a Zacks Rank #2 (Buy).
ALTRA HOLDINGS (AIMC): Free Stock Analysis
BARNES GRP (B): Free Stock Analysis Report
ILL TOOL WORKS (ITW): Free Stock Analysis
MIDDLEBY CORP (MIDD): Free Stock Analysis
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