Positive reactions that followed the news of Illinois Tool Works Inc’s (ITW - Free Report) plan to sell its Industrial Packaging segment sent the share price spiralling up 3% and then ended the trading session on Sep 24, 2013 with a gain of 2.3% over the previous day closing price.
Illinois Tool Works, as part of its key enterprise initiatives, had been pondering suitable options for this business since Feb 2013 and now after receiving its board of directors’ approval, it anticipates the divestiture to be completed by mid 2014.
The Industrial Packaging segment had contributed $2.4 billion or 13.5% of the company’s total revenue in 2012. The segment engages in the production of steel, plastic, and paper products used for bundling, shipping, and protecting transported goods.
Illinois Tool Works expects earnings impact of the divestiture to be neutral as it plans to negate the earnings dilution caused by the transaction with earnings accretion from share buybacks. As many as 50 million shares are intended to be repurchased under the existing authorization by the end of 2014 using primarily free cash flow, part of sales proceeds and additional funds.
In the third quarter 2013, Illinois Tool Works plans to move its Industrial Packaging business to discontinued operations. This reclassification along with an expected $40 million (or 9 cents per share) discrete tax charge related to foreign earnings has led to a downward revision in earnings estimate for the third quarter and full year 2013.
Management of Illinois Tool Works now anticipates earnings per share to fall within a range of 84–92 cents for the third quarter 2013 and $3.50-$3.66 for year 2013 as compared with previous expectations of $1.06-$1.16 and $4.10-$4.30, respectively. The divestiture has impacted the third quarter guidance by 13-15 cents and 2013 guidance by 51-55 cents.
This step is the second of its kind in a row after Illinois Tool Works divested its Decorative Surfaces division in October, 2012. The business sale then fetched the company roughly $1.05 billion along with a 49% stake in Wilsonart International Holdings, LLC, a new company formed after the divestment.
Such strategic selling of not so profitable businesses works well for the future growth of Illinois Tool Works by freeing resources that can be invested for development of core businesses. Based on its portfolio management initiative along with business simplification and strategic sourcing, the company aims to achieve organic growth of about 200 basis points above industrial production by 2017. Operating margins and return on invested capital are targeted to be above 20% by 2017.
Illinois Tool Works is one of the leading manufacturers of industrial products and equipment and has a $34.9 billion market capitalization. The stock currently has a Zacks Rank #4 (Sell). Other stocks to watch out for are EnPro Industries, Inc. (NPO - Free Report) and Gorman-Rupp Co. (GRC - Free Report) each with a Zacks Rank #1 (Strong Buy) while DXP Enterprises, Inc. (DXPE - Free Report) comes with a Zacks Rank of #2 (Buy).