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Solid Demand Aids Illinois Tool (ITW), Supply Chain & Costs Hurt

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Illinois Tool Works Inc. (ITW - Free Report) engages in manufacturing engineered products and specialty systems for use in multiple end markets. The Glenview, IL-based company has operations spread globally.

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 is benefiting from the recovery in economic activities and manufacturing operations. However, prevailing headwinds related to supply-chain restrictions and cost-related inflation are concerning for the players.

There are a number of factors that are influencing the company’s prospects. A brief discussion on the important factors and the company’s projections is given below:

Diversified Operations: The company’s exposure in multiple end markets and geographies raises its attractiveness. Weakness in one or more markets/geographies might be offset by strength in others. Regarding markets, the company’s products are used by customers in food retail, general industrial, construction, consumer durables, restaurants and others.

Geographically, the company has a significant presence in the United States, Canada/Mexico, Europe, the Middle East, Africa, the Asia Pacific and South America. Its products are available in more than 52 countries worldwide.

Shareholders’ Rewards: Healthy liquidity position equips Illinois Tool to pay dividends and execute share buybacks programs. In the first half of 2021, the company rewarded its shareholders with dividend payments totaling $721 million and share repurchases of $500 million.

Notably, the quarterly dividend payout rate was increased by 7% or 8 cents to $1.22 per share in August 2021. A share buyback program worth $3 billion was approved in May. In addition to the May program, the company is left to repurchase $740 million worth of shares from its August 2018 approved share buyback program.

Financial Projections: The company anticipates earnings of $8.55-$8.95 per share for 2021, suggesting mid-point growth of 32% from the year-ago reported figure. The projection was announced in July and reflected an increase from $8.20-$8.60 stated earlier.

Total revenues in the year are projected to increase 14-16% year over year, with organic sales growth of 11-13%. Earlier, total revenues were guided to grow 12-14%, with an organic sales increase of 10-12%. Enterprise initiatives — including Business Structure Simplification, Portfolio Management and Strategic Sourcing — are likely to contribute 100 basis points (bps) to the operating margin in 2021.

Cost Woes: In second-quarter 2021, the company experienced adverse impacts of high raw material costs and restricted supply of components in Automotive OEM. Its costs of sales grew 35.7% year over year, and it recorded a 21% increase in selling, administrative, and research and development expenses.

For 2021, the company expects supply-chain and raw material cost headwinds to persist. With effective pricing actions, these woes will have a neutral impact on earnings (on a dollar basis). However, the operating margin will have an adverse impact of 100 bps.

Some other players in the industry that have been adversely impacted by the above-mentioned prevailing headwinds are IDEX Corporation (IEX - Free Report) , Dover Corporation (DOV - Free Report) and Altra Industrial Motion Corp. (AIMC - Free Report) .

International Operations and High Debts: Though reflective of its growing businesses, international exposure has raised some concerns for Illinois Tools over time. Threats from local competition, unfavorable movements in foreign currencies, and geopolitical issues are expected to impact performances. Macroeconomic challenges might be concerning as well.

A highly leveraged balance sheet, with long-term debts of $7,056 million exiting second-quarter 2021, is concerning. Huge debts are unwelcoming as it raises risks of inflation in financial obligations and might hurt profitability.