Illinois Tool Works' (ITW) Prospects Bright: Time To Buy?

We issued an updated research report on industrial tool maker, Illinois Tool Works Inc. (NYSE:ITW) on Jun 27. We believe that this stock, with three to five years expected earnings growth rate of 7.50%, would be a good investment choice for investors seeking exposure in the machinery industry.

It is one of the leading companies in the Zacks categorized Machinery-General Industrial industry, currently ranked among the top 12% of the 256 industries. In the last three quarters, Illinois Tool Works returned 7.82%, outperforming the industry’s gain of roughly 6.37%.

We believe that impressive financial performance as well as bright future prospects supported market sentiments for Illinois Tool Works. A sneak peek into first-quarter 2017 results reveals that ongoing share buyback activity as well as benefits from its enterprise initiatives primarily drove the company’s profitability in the quarter. Additionally, earnings guidance for 2017 was revised upward from $6.00−$6.20 to $6.20−$6.40 per share. Organic revenue growth assumption of 2−4% further boosted confidence in the stock.

The company’s earnings estimates represent year-over-year growth of 11.34% for the second quarter, 12.46% for 2017 and 10.31% for 2018.

Illinois Tool Works is committed toward making acquisitions for the development of its core segments as well as creation of new platforms for expanding long-term growth opportunities. For instance, acquired assets of Engineered Fasteners and Components (completed in Jul 2016) contributed 3.8% to total revenue growth in first-quarter 2017. Also, the company believes in rewarding its shareholders handsomely through dividend payments and share buybacks. It targets spending nearly 30−35% of its operating cash flow on dividend payments and 40−45% on external investments including share buybacks and acquisitions.

In addition, the company has some long-term targets set for the end of 2018 and beyond. It targets to achieve organic revenue growth of 200 basis points above market, an approximate operating margin of 25% and return on invested capital of above 20%.

Zacks Rank & Other Stocks to Consider

Illinois Tool Works, with a market capitalization of $49.15 billion, currently carries a Zacks Rank #2 (Buy). Some other stocks worth considering in the machinery industry include Kennametal Inc. (NYSE:KMT) , Parker-Hannifin Corporation (NYSE:PH) and Regal Beloit Corporation (NYSE:RBC) . All three stocks carry a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Kennametal’s earnings estimates for fiscal 2018 were revised upward in the last 60 days. Also, the company’s average earnings surprise for the last four quarters was a positive 6.24%.

Parker-Hannifin’s average earnings surprise for the last four quarters was a positive 14.94%. Also, earnings expectations for fiscal 2017 and fiscal 2018 improved over the past 60 days.

Regal Beloit’s earnings estimates for 2017 and 2018 were revised upward in the last 60 days. Also, the company’s average earnings surprise for the last four quarters was a positive 1.48%.

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