Good Performance Still Doesn’t Support Illinois Tool Works’ Levels; Stock Meaningfully Overvalued

We were completely surprised by the market’s reaction following narrow-moat-rated Illinois Tool Works’ fourth-quarter earnings release. Results and guidance mostly came below our expectations, despite the litany of positive affirmations from the sell-side. While we acknowledge that ITW as a business and its management certainly deserve credit navigating a very difficult short-cycle macro environment, the stock’s fundamentals simply don’t support its valuation, even after awarding it a premium multiple relative to forward earnings. Despite the stock rising 4% to 5% on the Feb. 2 trading day adding to already strong momentum since fall 2022, we lower our fair value estimate to $203 from $208 to reflect our reduced forward expectations. We value ITW at about 21 times our 2023 adjusted EPS expectations of $9.79, which rests near the top end of the guide.