We issued an updated research report on Illinois Tool Works Inc.ITW on Sep 16, 2016. The machinery company is renowned globally for its highly engineered products and specialty systems.
Illinois Tool Works, with $41.7 billion in market capitalization, has strong fundamentals, supporting growth. Below we briefly discuss the company's tailwinds.
We believe that product & end-market diversification have been Illinois Tool Works' biggest strength over time, providing it competitive advantage over its peers. The company has a diversified and technologically advanced product portfolio, including an array of highly engineered fasteners and components, equipment and consumable systems, and specialty products and equipments. It serves a vast clientele in the industrial, automotive, food, welding, construction, beverages and others end markets. The combined impact of solid products and vast customer base is likely to boost Illinois Tool Works' organic growth in the years ahead.
Also, Illinois Tool Works' long-term Enterprise Strategy (2012−2017) will help it ensure maximum profitability through development of new, improved products and effective cost-control. These strategies include Business Structure Simplification, Portfolio Management and Strategic Sourcing. Overall, this strategic trio is expected to save approximately $600−$800 million in structural costs, enabling the company to achieve its targets of organic revenue growth of 200 basis points (bps) or more above global the Gross Domestic Product, an approximate operating margin of 23%, and return on invested capital of above 20%.
Also, the continuous application of its 80/20 business process (to focus more on 20% of the items which account for 80% of the value and less on 80% of the items which account for 20% of the value) for both existing businesses and new acquisitions will help Illinois Tool Works achieve higher operating margins, better capital efficiency and solid return on invested capital. Moreover, accelerated share buybacks and dividend payments are expected to boost shareholders' returns.
For 2016, Illinois Tool Works increased its earnings guidance to $5.50−$5.70 from the previous expectation of $5.40−$5.60 per share. Operating margin is expected to exceed 22.5%, driven by more than 100 bps contribution from the company's enterprise initiatives.
We believe these tailwinds of Illinois Tool Works more-than-offset any adverse impacts from forex woes, geopolitical issues, global uncertainties, huge debt-level, stiff industry rivalry, volatilities in input price & supply and difficulties or delays in research and development or production and services.
Illinois Tool Works currently carries a Zacks Rank #2 (Buy). Other stocks worth considering in the machinery industry include DXP Enterprises, Inc. DXPE , Tennant Company TNC and Gorman-Rupp Co. GRC . While both DXP Enterprises and Tennant Company sport a Zacks Rank #1 (Strong Buy), Gorman-Rupp carries the same Zacks Rank as Illinois Tool Works. You can see the complete list of today's Zacks #1 Rank stocks here .
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