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Illinois Tool is Executing on a Very High Level

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Stock (Symbol)

Illinois Tool Works (ITW)

Stock Price

$157

Sector
Food & Necessities
Data is as of
November 12, 2017
Expected to Report
Jan 23
Company Description
illinoistool_innovationsIllinois Tool Works Inc. (ITW) is a manufacturer of a range of industrial products and equipment. The Company’s operates in seven segments: Automotive OEM, Test & Measurement and Electronics, Food Equipment, Polymers & Fluids, Welding, Construction Products and Specialty Products. These operations serve end markets as automotive original equipment manufacturers/tiers, automotive aftermarket, general industrial, commercial food equipment and construction. Source: Thomson Financial
Sharek’s Take
David SharekIllinois Tool Works (ITW) is executing on a very high level, and is growing profits around 15% a qtr, which is excellent for a conservative Blue Chip stock. Illinois Tool Works was founded more than 100 years ago. The company is a diversified industrial manufacturer that makes all sorts of stuff from baking ovens to car parts. It did $14.1 billion in sales last year through 7 business segments:

Automotive Original Equipment Manufacturing, $2.9 bil sales
Food & Equipment, $2.1 bil
Test & Measurement and Electronics, $2.0 bil
Specialty Products, $1.9 bil
Polymers & Fluids, $1.7 bil
Construction Products, $1.6 bil
Welding, $1.5 Bil

In 2012 management instituted a program to focus the company on what’s profitable, such as auto parts, food equipment and construction parts. So it sold off divisions of the business that it couldn’t raise prices or profit margins in. This has been a roaring success as profit margins expanded from 16% to 23% through 2016. Illinois Tool Works gets a top rating for safety, and has grown its dividend each year since 1964. Management bought back $2 billion in stock in 2016 just raised the qtrly dividend 20% this past August. This is a great buy-and-hold stock for conservative investors. The Est. LTG just increased from 8% a year to 10% a year and the stock pays a 2% dividend yield. But for all this greatness, the stock comes with a premium price. ITW currently sells for 22x 2018 profit estimates, which is high for a 10% grower. But ITW is deserving of a premium P/E. Illinois Tool Works is a good investment when the economy is rising, and with the economy in great shape today this stock should continue to be timely in the year ahead. 

One Year Chart
Last qtr ITW grew sales 4%. Profits grew 23% but some of that was from a legal settlement. Excluding that gain profit growth was 14%. Qtrly Profit Estimates are solid at 16%10%, 10% and 0% (this last qtr needs time to bake). Annual profit estimates have risen four straight qtrs, with 2017’s increasing from $6.18 to $6.68 during that time. That has probably played the biggest impact on the stock’s rise.
Fair Value
My Fair Value is a rich 22x earnings. But honestly the way estimates are rising one could argue this stock is worthy of a 24 P/E (which is where it stands now). So although my calculations point to limited upside here, I feel the stock will continue to outperform expectations.  
Bottom Line
Illinois Tool Works is a solid core holding for conservative investors. It’s a safe industrial stock with a 10% Est LTG in addition to a 2% dividend that’s increased every year since 1964. I feel this stock is fairly valued right now, but I’ve been saying that for years and the stock continues to climb higher. In the end this is a company dependant on the economy and with the economy clicking along right now this stock is a solid selection for 2018. ITW ranks 28th in the Conservative Portfolio Power Rankings. I’d love to put it higher but the upside to 2018’s Fair Value isn’t much.
Power Rankings
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David Sharek David Sharek is stock portfolio manager and CEO of DavidSharek.com. David believes a company's profits ultimately drive the price of its stock. His book The School of Hard Stocks can be found on Amazon.com.