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Illinois Tool (ITW) Prospects Bright, Runs Near-Term Risks

We issued an updated research report on Illinois Tool Works Inc. ITW on Apr 4, 2016. This machinery company is recognized globally for its highly engineered products and specialty systems.

One of the most striking features of Illinois Tool Works is its diversified product portfolio and a wide customer base in the industrial, automotive, food, welding, construction, beverages and others end markets. The company prefers using both organic and inorganic strategies to strengthen its foothold in existing and new markets. By the end of 2017, the company targets organic revenue growth of 200 bps above global Gross Domestic Product (“GDP”), an approximate operating margin of 23%, and return on invested capital (“ROIC”) of above 20%.

In addition, Illinois Tool Works’ long-term Enetrprise Strategy (2012−2017), including Business Structure Simplification, Portfolio Management and Strategic Sourcing, will help it ensure maximum profitability through the development of new and improved products, and reasonable cost control. Also, the company prefers rewarding its shareholders handsomely with share buybacks and dividend payments. For 2016, enterprise initiatives are likely to contribute 100 bps to operating margin growth while share buybacks are estimated at $2 billion.

However, Illinois Tool Works is not immune to the risks associated with industry rivalry, volatilities in input price & supply, and economic uncertainties. In fourth-quarter 2015, macro headwinds, characterized by fluctuating currency movements, globally weak economic conditions and soft commodity prices, played spoilsport for the U.S.-based machinery companies.

In 2016, Illinois Tool Works anticipates adverse foreign currency movements to negatively impact earnings by approximately 4%. Total revenue will likely decline 2% to remain flat. In addition to these macro woes, the company’s huge debt level might limit its profitability.

Illinois Tool Works, with a $37.1-billion market capitalization, currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the sector include Sun Hydraulics Corp. SNHY, Colfax Corporation CFX and Nordson Corporation NDSN. While Sun Hydraulics sports a Zacks Rank #1 (Strong Buy), both Colfax and Nordson carry a Zacks Rank #2 (Buy).

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ILL TOOL WORKS (ITW): Free Stock Analysis Report
 
NORDSON CORP (NDSN): Free Stock Analysis Report
 
SUN HYDRAULICS (SNHY): Free Stock Analysis Report
 
COLFAX CORP (CFX): Free Stock Analysis Report
 
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