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We issued an updated research report on Illinois Tool Works Inc. (ITW - Free Report) on Jun 10, 2016. The $38.8 billion company is well-recognized globally for its highly engineered products and specialty systems. The company offers solid long-term growth potential, but certain near-term risks might restrict its growth momentum.
Below we briefly discuss Illinois Tool Works’ tailwinds and headwinds.
Growth Drivers
Product & End-Market Diversification: Illinois Tool Works seems well-positioned to benefit from its diversified and technologically advanced product portfolio that includes an array of highly engineered fasteners and components, equipment and consumable systems, and specialty products and equipments. Also, the company has 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 the company’s organic growth.
Growth Strategies & Long-Term Targets: Illinois Tool Works’ Enterprise Strategy (2012−2017), comprising Business Structure Simplification, Portfolio Management and Strategic Sourcing, will help it ensure maximum profitability through development of new, improved products and effective cost-control. This strategic trio is expected to save approximately $600−$800 million in structural costs, enabling the company to achieve its long-term targets of organic revenue growth of 200 bps or more above global Gross Domestic Product, an approximate operating margin of 23%, and return on invested capital of above 20%. Also, continuous application of 80/20 business process for both existing businesses and new acquisitions will help the company achieve higher operating margins, better capital efficiency and solid return on invested capital.
Shareholders’ Return: Illinois Tool Works has been consistently rewarding its shareholders with dividend payments and share buybacks. For 2016, the company plans to repurchase shares worth $2 billion. Such disbursements are reflective of the company’s strong cash position, with free cash flow conversion anticipated to be greater than 100%.
Promising ’16 Guidance: An impressive first-quarter 2016 earnings beat as well as expectations of better operating conditions made Illinois Tool Works increase its 2016 guidance. Earnings are anticipated to be within $5.40−$5.60 per share range, up $0.05 from the previous earnings guidance of $5.35−$5.55. The revised guidance reflects a 7% year-over-year increase at mid-point. Organic revenue growth is expected to be 1−3%. Operating margin will likely be more than 22.5%, driven by at least 100 bps contributions from the company’s enterprise initiatives.
Near-Term Headwinds
Risks Associated with International Operations: International expansion of businesses has exposed Illinois Tool Works to risks arising from foreign currency translations and other geopolitical issues. Forex losses negatively impacted the company’s top-line in first-quarter 2016 and such influences are likely to continue in the quarters ahead.
Relation to Global Uncertainties: Illinois Tool Works is highly susceptible to global economic conditions as well as level of industrial activities in the U.S. In first-quarter 2016, macro headwinds, characterized by fluctuating currency movements and globally weak economic conditions played spoilsport for the U.S. based machinery companies. Industrial production in the U.S. declined 2.2% year over year in the quarter. Such negatives adversely influenced the company’s sales, earnings and cash flow.
Highly Leveraged: Illinois Tool Works is highly leveraged company with a long-term debt balance of approximately $6.4 billion at the end of first-quarter 2016. Its total debt-to-EBITDA ratio was 2.1x in the first quarter. If unchecked, higher debt levels might increase the company’s financial obligations and be detrimental to its profitability.
Other Headwinds: Illinois Tool Works is also exposed to risks arising from stiff industry rivalry, volatilities in input price & supply and difficulties or delays in research and development or production and services.
Conclusion
Illinois Tool Works currently carries a Zacks Rank #3 (Hold). We believe the above-mentioned pros and cons clearly justify the company’s investment value.
However, there are certain stocks in the machinery industry that have been performing better than Illinois Tool Works and have gained high investment value. They include Gorman-Rupp Co. (GRC - Free Report) , Kadant Inc. (KAI - Free Report) and Luxfer Holdings PLC (LXFR - Free Report) . All these stocks sport a Zacks Rank #1 (Strong Buy).
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Illinois Tool's Growth Potential Solid, Runs Near-Term Risks
We issued an updated research report on Illinois Tool Works Inc. (ITW - Free Report) on Jun 10, 2016. The $38.8 billion company is well-recognized globally for its highly engineered products and specialty systems. The company offers solid long-term growth potential, but certain near-term risks might restrict its growth momentum.
Below we briefly discuss Illinois Tool Works’ tailwinds and headwinds.
Growth Drivers
Product & End-Market Diversification: Illinois Tool Works seems well-positioned to benefit from its diversified and technologically advanced product portfolio that includes an array of highly engineered fasteners and components, equipment and consumable systems, and specialty products and equipments. Also, the company has 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 the company’s organic growth.
Growth Strategies & Long-Term Targets: Illinois Tool Works’ Enterprise Strategy (2012−2017), comprising Business Structure Simplification, Portfolio Management and Strategic Sourcing, will help it ensure maximum profitability through development of new, improved products and effective cost-control. This strategic trio is expected to save approximately $600−$800 million in structural costs, enabling the company to achieve its long-term targets of organic revenue growth of 200 bps or more above global Gross Domestic Product, an approximate operating margin of 23%, and return on invested capital of above 20%. Also, continuous application of 80/20 business process for both existing businesses and new acquisitions will help the company achieve higher operating margins, better capital efficiency and solid return on invested capital.
Shareholders’ Return: Illinois Tool Works has been consistently rewarding its shareholders with dividend payments and share buybacks. For 2016, the company plans to repurchase shares worth $2 billion. Such disbursements are reflective of the company’s strong cash position, with free cash flow conversion anticipated to be greater than 100%.
Promising ’16 Guidance: An impressive first-quarter 2016 earnings beat as well as expectations of better operating conditions made Illinois Tool Works increase its 2016 guidance. Earnings are anticipated to be within $5.40−$5.60 per share range, up $0.05 from the previous earnings guidance of $5.35−$5.55. The revised guidance reflects a 7% year-over-year increase at mid-point. Organic revenue growth is expected to be 1−3%. Operating margin will likely be more than 22.5%, driven by at least 100 bps contributions from the company’s enterprise initiatives.
Near-Term Headwinds
Risks Associated with International Operations: International expansion of businesses has exposed Illinois Tool Works to risks arising from foreign currency translations and other geopolitical issues. Forex losses negatively impacted the company’s top-line in first-quarter 2016 and such influences are likely to continue in the quarters ahead.
Relation to Global Uncertainties: Illinois Tool Works is highly susceptible to global economic conditions as well as level of industrial activities in the U.S. In first-quarter 2016, macro headwinds, characterized by fluctuating currency movements and globally weak economic conditions played spoilsport for the U.S. based machinery companies. Industrial production in the U.S. declined 2.2% year over year in the quarter. Such negatives adversely influenced the company’s sales, earnings and cash flow.
Highly Leveraged: Illinois Tool Works is highly leveraged company with a long-term debt balance of approximately $6.4 billion at the end of first-quarter 2016. Its total debt-to-EBITDA ratio was 2.1x in the first quarter. If unchecked, higher debt levels might increase the company’s financial obligations and be detrimental to its profitability.
Other Headwinds: Illinois Tool Works is also exposed to risks arising from stiff industry rivalry, volatilities in input price & supply and difficulties or delays in research and development or production and services.
Conclusion
Illinois Tool Works currently carries a Zacks Rank #3 (Hold). We believe the above-mentioned pros and cons clearly justify the company’s investment value.
However, there are certain stocks in the machinery industry that have been performing better than Illinois Tool Works and have gained high investment value. They include Gorman-Rupp Co. (GRC - Free Report) , Kadant Inc. (KAI - Free Report) and Luxfer Holdings PLC (LXFR - Free Report) . All these stocks sport a Zacks Rank #1 (Strong 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 >>