Markets
ITW

Illinois Tool Works: Market Woes Threaten Solid Prospects

An image of stock prices rising and declining in value
Credit: Shutterstock photo

We issued an updated research report on Illinois Tool Works Inc.ITW on Sep 30, 2015. The company is a worldwide manufacturer of highly engineered products and specialty systems.

Macroeconomic headwinds, characterized by a weak global economic outlook, particularly in China, and soft commodity prices, continue to affect the near- to medium-term outlook of industrial equipment makers. In Aug 2015, industrial production in the U.S. edged down 0.4% sequentially, due to a 0.5% fall in manufacturing and 0.6% decline in mining outputs.

For second-quarter 2015, industrial production declined 1.4% year over year. Also, weakening export demand for U.S.-manufactured machinery remains a matter of concern. In the first 8 months of 2015, machinery shipments fell 1.4% year over year. New orders were down 8.3%, while order backlog decreased 8.7%.

We believe the global uncertainties have not only impacted demand for Illinois Tool Works' products in second-quarter 2015, but will likely loom large in the quarters ahead as well. Also, the company's international operations are adversely impacted by unfavorable foreign currency movements. For 2015, forex headwind is anticipated to impact revenue growth by 7% and earnings growth by 8% at the mid-point of $5.15. At the same time, higher contribution from international operations is detrimental to the company's operating margin expansion, as foreign sales usually carry lower margins compared with domestic sales.

Nevertheless, despite these near-term worries, Illinois Tool Works holds strong potential. The company boasts a well-diversified product portfolio and a large customer base. Also, its long-term Enetrprise Strategy (2012−2017) will help it ensure maximum profitability through development of new, improved products and reasonable cost-control. These schemes include Business Structure Simplification, Portfolio Management and Strategic Sourcing. Overall, this strategic trio is expected to save approximately $600−$800 million in structural costs, thereby supporting the company in its attempt to achieve 23% operating margin and improvement of +700 basis points (bps) in operating margin by 2017.

In addition, Illinois Tool Works' sound capital allocation policies are reflective of its strong cash position. In Aug 2015, the company announced a 13.4% increase in its quarterly dividend rate, while it plans to spend $2 billion for buying back shares in 2015.

With a market capitalization of nearly $30.1 billion, Illinois Tool Works presently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the machinery industry include Graco Inc. GGG , Luxfer Holdings PLC LXFR and Graham Corporation GHM , each holding a Zacks Rank #2 (Buy).

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days . Click to get this free report >>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

GRACO INC (GGG): Free Stock Analysis Report

ILL TOOL WORKS (ITW): Free Stock Analysis Report

GRAHAM CORP (GHM): Free Stock Analysis Report

LUXFER HOLDINGS (LXFR): Free Stock Analysis Report

To read this article on Zacks.com click here.

Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story

ITW GGG GHM LXFR

Other Topics

Stocks

Latest Markets Videos

    Zacks

    Zacks is the leading investment research firm focusing on stock research, analysis and recommendations. In 1978, our founder discovered the power of earnings estimate revisions to enable profitable investment decisions. Today, that discovery is still the heart of the Zacks Rank. A wealth of resources for individual investors is available at www.zacks.com.

    Learn More