What Makes Illinois Tool (ITW) A Solid Investment Choice?

We issued an updated research report on industrial tool maker, Illinois Tool Works Inc. (NYSE:ITW) on Oct 3. We believe that diversified business structure, strategic initiatives to improve margins and inorganic activities makes this stock an attractive investment choice for investors seeking exposure in the machinery industry.

It currently carries a Zacks Rank #2 (Buy). The company’s earnings are projected to grow 9% in the next three to five years.

Also, market sentiments have been positive for Illinois Tool Works over time. Notably, the stock has yielded 22.6% return year to date, marginally outperforming 22.2% gain recorded by the industry it belongs to.



Below we discuss why investors should consider buying Illinois Tool Works’ stock.

Diversification Business Structure: Illinois Tool Works is poised to gain from its vast customer base in the automotive original equipment manufacturer, automotive aftermarket, general industrial, commercial food equipment, construction and other end markets. Also, its highly engineered fasteners and components, equipment and consumable systems, and specialty products and equipments give it a competitive edge.

Furthermore, international diversity has played a major role in Illinois Tool Works’ profitability over time. The company has operations in over 57 countries. Notably, it derived nearly 45% of net revenues from its operations in the United States in 2016 while the rest were secured from Canada/Mexico; Europe, Middle East and Africa; Asia Pacific and South America.

Strategic Initiatives: We believe that Illinois Tool Works’ long-term Enterprise Strategy has enabled it to ensure maximum profitability through the development of new, improved products and reasonable cost control. These strategies include Business Structure Simplification, Portfolio Management and Strategic Sourcing. For 2017, enterprise initiatives are likely to contribute 100 basis points (bps) to operating margin growth. Also, the company has benefitted from 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).

Over time, acquired assets have strengthened the company’s core segments while creating new business opportunities in unexplored markets. Noteworthy is the company’s acquired Engineered Fasteners and Components business of ZF TRW in 2016. This buyout has expanded its product offerings under the Automotive OEM segment, contributing 6.5% to revenue growth in the second quarter.

Shareholders’ Return: Share buybacks and dividend payments are the prime means of returning value to shareholders for Illinois Tool Works. In August 2017, the company hiked its quarterly dividend by 20%. Over the long term, it anticipates spending nearly 30-35% on dividend payments and 40-45% on external investments including share buybacks and acquisitions.

Promising 2017 Guidance & Long-Term Targets: For 2017, Illinois Tool Works increased its earnings guidance to $6.32-$6.52 per share from the earlier projection of $6.20-$6.40. Total revenues are anticipated to be within $14.1-$14.2 billion, up from $13.9-$14.1 billion expected earlier. Organic revenue growth is expected to be 2-4% while operating margin is expected to be 24%.

By the end of 2018 and beyond, the company expects organic revenue growth to be 200 bps above market, an approximate operating margin of 25% (previous expectation was 23%), and return on invested capital of above 20%. Beyond 2018, shareholders’ returns are expected within 12-14% (including operating income growth of 9-10%, 1-2% earnings accretion from share repurchases and 2% dividend yield). Organic revenue growth rate is projected to be roughly 5%.

Other Stocks to Consider

Illinois Tool Works currently carries a market capitalization of $51.7 billion. We believe that the above-mentioned positives clearly justify the stock’s current ranking.

In the machinery space, some other stocks worth considering are Sun Hydraulics Corporation (NASDAQ:SNHY) , Colfax Corporation (NYSE:CFX) and Barnes Group, Inc. (NYSE:B) . While Sun Hydraulics sports a Zacks Rank #1 (Strong Buy), both Colfax and Barnes Group carry a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Sun Hydraulics pulled off an average positive earnings surprise of 3.47% for the last four quarters. Also, its earnings estimates for 2017 and 2018 improved in the last 60 days.

Colfax’s earnings estimates for 2018 were revised upward in the last 60 days. Also, the company delivered an average positive earnings surprise of 8.16% in the last four quarters.

Barnes Group’s earnings estimates for 2018 were revised upward in the last 60 days. Also, the company’s average earnings surprise for the last four quarters was a positive 11.60%.

Will You Make a Fortune on the Shift to Electric Cars?

Here's another stock idea to consider. Much like petroleum 150 years ago, lithium power may soon shake the world, creating millionaires and reshaping geo-politics. Soon electric vehicles (EVs) may be cheaper than gas guzzlers. Some are already reaching 265 miles on a single charge.

With battery prices plummeting and charging stations set to multiply, one company stands out as the #1 stock to buy according to Zacks research.

It's not the one you think.

See This Ticker Free >>

Illinois Tool Works Inc. (ITW): Free Stock Analysis Report

Barnes Group, Inc. (B): Free Stock Analysis Report

Sun Hydraulics Corporation (SNHY): Free Stock Analysis Report

Colfax Corporation (CFX): Free Stock Analysis Report

Original post

Zacks Investment Research