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Illinois Tool Works Faces Near-Term Risks, Rewards Shareholders - Analyst Blog

Posted: 7/3/2014 12:50:00 PM
Referenced Stocks: DOV;ITW;NPO;BLT

On Jun 27, 2014, we issued an updated research report on Illinois Tool Works Inc. ( ITW ). The company is one of the leading manufacturers of industrial products and equipments. In the past five years, its earnings have grown by 5.0% while a 9.3% increase is expected in the next five years.

A couple of months ago, Illinois Tool Works divested its Industrial Packaging business to the Carlyle Group for $3.2 billion. The transaction is anticipated to work in the best interests of the company's shareholders. In addition to freeing resources, accelerated share buybacks related to the divestiture will reduce the company's shares outstanding and thus, positively impact earnings per share.

Also, Illinois Tool Works follows a consistent policy of rewarding its shareholders through dividend payments. A quarterly dividend of 42 cents per share will be paid on Jul 8, to shareholders of record as on Jun 30. The company distributed dividends of $700 million and bought back shares worth $2.2 billion in 2013. Further, it aims to use approximately $700 million for dividend payments and $1.8 billion for share buybacks in 2014.

However, we believe that Illinois Tool Works' share price currently discounts all these positives factors and has little room for further expansion. To add to the woes, there are certain near-term risks arising from foreign currency translation and competitive pressure, among others.

The Zacks Consensus Estimate for Illinois Tool Works is pegged at $4.56 for 2014 and $5.23 for 2015. These estimates reflect year-over-year growth of 25.6% for 2014 and 14.7% for 2015.  

Illinois Tool Works currently has a $36 billion market capitalization and carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the industry include Blount International Inc. ( BLT ), EnPro Industries, Inc. ( NPO ) and Dover Corporation ( DOV ). While Blount International and EnPro Industries sport a Zacks Rank #1 (Strong Buy), Dover Corp. holds a Zacks Rank #2 (Buy).

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