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Illinois Tool (ITW) Gains From Market Strength Amid Cost Woes

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Illinois Tool Works Inc. (ITW - Free Report) , which is based in Glenview, IL, engages in manufacturing and supplying engineered products and specialty systems. The products are sold in 52 countries to customers in multiple end markets, including general industrial, consumer durables, food retail, restaurant and construction. It presently has a $72.6-billion market capitalization.

The company belongs to the Zacks Manufacturing - General Industrial industry, which, in turn, comes under the ambit of the Zacks Industrial Products sector. The industry comes in the top 30% (with the rank of 75) of more than 250 Zacks industries. The company presently carries a Zacks Rank #3 (Hold).

In the past six months, the company’s shares have gained 11.4% compared with the industry’s growth of 6.7%


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There are a number of factors that are influencing Illinois Tool’s prospects. A brief discussion on important factors and earnings estimates is discussed below:

Financial Performance and Projections: The company’s financial performance was impressive in the last reported quarter, with earnings and sales beating the Zacks Consensus Estimate by 11.1% and 3.3%, respectively. On a year-over-year basis, earnings expanded 19.2% on the back of 9.8% growth in revenues and margin improvements.

Solid product offerings, diversified business operations, strengthening end markets and enterprise strategy are likely tailwinds for the quarters ahead. Illinois Tool increased its projections for 2021, anticipating year-over-year revenue growth of 14-16% and earnings of $8.55-$8.95 per share. The projections compare favorably with the previously mentioned sales growth of 12-14% and earnings of $8.20-$8.60. Enterprise strategy is predicted to contribute 100 basis points (bps) to the operating margin.

In the past 60 days, the company's Zacks Consensus Estimate for earnings per share has increased 0.7% to $8.56 for 2021 and 0.4% to $9.31 for 2022.

Capital Allocation & Liquidity: The company effectively uses its capital for rewarding shareholders and boosting organic prospects. It paid out dividends of $721 million in the first half of 2021. Also, after a halt due to the pandemic, the company reinstated its share-buyback activities in February 2021. It brought back shares worth $500 million in the first six months of 2021. Notably, dividends totaling $680 million were distributed and shares worth $706 million were bought back in the first half of 2020.

It is worth mentioning here that Illinois Tool intends on buying back $1 billion worth of shares in 2021. Exiting second-quarter 2021, the share-buyback authorization of $3.740 billion is left for the company. In April 2021, it hiked its quarterly dividend rate by 7%.

Regarding liquidity, Illinois Tool’s cash and cash equivalents were $2.1 billion at the second-quarter end. It expects a free cash flow conversion of 100% for 2021.

Cost Woes: The company suffered from supply-chain constraints and a hike in raw material costs in second-quarter 2021. Its cost of sales, and selling, administrative, and research and development expenses expanded 35.7% and 21% from the year-ago quarter, respectively. The headwinds are predicted to persist throughout the rest of 2021.

Pricing actions are likely to offset the impacts of high costs on a dollar-on-dollar basis. However, price/costs are expected to hurt the operating margin by 100 bps.

International Operations, High Debts & Industry Peers: Illinois Tool carries out its operations in multiple countries, including the United States, Europe, Africa, the Middle East and the Asia Pacific. International diversification has exposed it to unfavorable movements in foreign currencies, geopolitical issues, local competitive pressure and macroeconomic challenges. Also, high debts of $7,056 million at the end of second-quarter 2021 might be concerning as it raises risks of a hike in financial obligations.

Three companies in the same industry and with better ranks are Manitex International, Inc. (MNTX - Free Report) , Applied Industrial Technologies, Inc. (AIT - Free Report) and Dover Corporation (DOV - Free Report) .

While Manitex presently sports a Zacks Rank #1 (Strong Buy), both Applied Industrial and Dover carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

In the past 60 days, earnings estimates for these companies have improved for the current year. Further, positive earnings surprise for the last reported quarter was 450.00% for Manitex, 27.97% for Applied Industrial and 11.96% for Dover.