Company Reports

Narrow-moat Illinois Tool Works reported solid first-quarter results on April 30 as the company reported growth in line with market expectations while generating adjusted EPS (excluding an accounting change) growth of 5% year over year to $2.44, beating the LSEG consensus of $2.36. We have increased our fair value estimate to $214 per share from $211 per share, on the time value of money and on management raising full-year 2024 GAAP EPS guidance to $10.30-$10.70 from $10.00-$10.40.

We view Illinois Tool Works as a well-run collection of moaty businesses. The company focuses on niche markets, with most of its activities centered on resolving its most valuable customers’ pain points. ITW’s products and services are designed to reduce customers’ costs, either through ease of use, which lowers training costs, ensuring compliance with environmental and safety standards through quality products, or eliminating steps or parts in a manufacturing process. ITW is famous for using an 80/20 process (an application of the Pareto principle) that focuses on the most lucrative profit opportunities that it calls the 80. Every project comes from a customer problem that ITW solves through what it calls Customer-Back Innovation. In 2023, ITW said that CBI contributes about 200 basis points to annual organic growth.

We view Illinois Tool Works as a well-run collection of moaty businesses. The company focuses on niche markets, with most of its activities centered on resolving its most valuable customers’ pain points. ITW’s products and services are designed to reduce customers’ costs, either through ease of use, which lowers training costs, ensuring compliance with environmental and safety standards through quality products, or eliminating steps or parts in a manufacturing process. ITW is famous for using an 80/20 process (an application of the Pareto principle) that focuses on the most lucrative profit opportunities that it calls the 80. Every project comes from a customer problem that ITW solves through what it calls Customer-Back Innovation. In 2023, ITW said that CBI contributes about 200 basis points to annual organic growth.

ITW ended 2023 with fourth-quarter results providing no surprises. Adjusted EPS increased 3.4% year over year to $2.42, which excludes a $0.04 hit for Argentine currency devaluation. Operating margin was flat year over year at 24.8%, however, free cash flow increased 39% to a record $908 million. We are not changing our fair value estimate at this time but will reassess all modeling inputs while rolling our model for the 10-K.

We view Illinois Tool Works as a well-run collection of moaty businesses. The company focuses on niche markets, with most of its activities centered on resolving its most valuable customers’ pain points. ITW’s products and services are designed to reduce customers’ costs, either through ease of use, which cuts down on training costs, ensuring compliance with environmental and safety standards through quality products, or eliminating steps or parts in a manufacturing process. ITW is famous for using an 80/20 process (an application of the Pareto principle) that focuses on the most lucrative profit opportunities that it calls the 80. Every project comes from a customer problem that ITW solves through what it calls Customer-Back Innovation. In 2023, ITW said that CBI contributes about 200 basis points to annual organic growth.

We raise our fair value estimate for narrow-moat Illinois Tool Works to $211 from $203 following strong third-quarter results. The raise was due to about a 20-basis-point rise in our midcycle margin and slightly higher stage-two growth. While Illinois Tool Works’ stock historically trades at a premium to our fair value, we think it now trades within a realm of reasonableness. We value ITW at 19 times our estimated 2024 GAAP EPS.

We view Illinois Tool Works as a well-run collection of moaty businesses. The company focuses on niche markets, with most of its activities centered on resolving its most valuable customers’ pain points. ITW’s products and services are designed to reduce customers’ costs, either through ease of use, which cuts down on training costs, ensuring compliance with environmental and safety standards through quality products, or eliminating steps in a manufacturing process or parts in an assembly.

Illinois Tool Works announced the departure of CEO Scott Santi, effective Jan. 1, 2024. Santi will remain as board chair until March 1. The firm will certainly miss Santi, but we like the choice of Christopher O’Herlihy, and we’re not surprised by the announcement. More importantly, from a shareholder standpoint, ITW’s enterprise and 80/20 strategy is institutionalized, meaning its operating model isn't based on one person, nor is it governed by top-down edicts. Quite the contrary, the businesses must apply the playbook, but how they choose to do so is done on a bottoms-up basis.

We see no reason to alter our $203 fair value estimate following narrow-moat rated ITW’s second quarter 2023 results. Consolidated revenue rose to $4.07 billion or 3% organically, while operating margins rose 170 basis-points to 24.8%. This lifted GAAP EPS by 5% year on year to $2.48.

We view Illinois Tool Works as a well-run collection of moaty businesses. The company focuses on niche markets, with most of its activities centered on resolving its most valuable customers’ pain points. ITW’s products and services are designed to reduce customers’ costs, either through ease of use, which cuts down on training costs, ensuring compliance with environmental and safety standards through quality products, or eliminating steps in a manufacturing process or parts in an assembly.

Nothing in narrow-moat-rated Illinois Tool Works' latest results materially alters our long-term view. Even on a near-term basis, results were broadly in line with our expectations, as both revenue and GAAP EPS missed our expectations by a negligible 1%. Even so, they mostly followed a typical seasonal pattern. Therefore, we maintain our $203 fair value estimate. While the stock fell nearly 5% on the May 2 trading day, we still think the stock is about 15% overvalued. We value Illinois Tool Works at 21 times our 2023 GAAP EPS estimate of $9.69, just above the midpoint of the company’s revised EPS guidance.

We view Illinois Tool Works as a well-run collection of moaty businesses. The company focuses on niche markets, with most of its activities centered on resolving its most valuable customers’ pain points. ITW’s products and services are designed to reduce customers’ costs, either through ease of use, which cuts down on training costs, ensuring compliance with environmental and safety standards through quality products, or eliminating steps in a manufacturing process or parts in an assembly.

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.

We view Illinois Tool Works as a well-run collection of moaty businesses. The company focuses on niche markets, with most of its activities centered on resolving its most valuable customers’ pain points. ITW’s products and services are designed to reduce customers’ costs, either through ease of use, which cuts down on training costs, ensuring compliance with environmental and safety standards through quality products, or eliminating steps in a manufacturing process or parts in an assembly.

Nothing in narrow-moat-rated Illinois Tool Works’ latest results materially alters our long-term view of the firm, either in revenue, operating margins, free cash flow, or returns on capital. That said, we did add an incremental near $200 million of revenue to our full-year expectations for the firm (now $16.0 billion) and added an incremental 25 cents to our full-year EPS projection of $9.43 (a variance of less than 3% relative to our prior expectations). These changes were small, and we lift our fair value estimate to $208 from $205, due to time value of money.

We view Illinois Tool Works as a well-run collection of moaty businesses. The company focuses on niche markets, with most of its activities centered on resolving its most valuable customers’ pain points. ITW’s products and services are designed to reduce customers’ costs, either through ease of use, which cuts down on training costs, ensuring compliance with environmental and safety standards through quality products, or eliminating steps in a manufacturing process or parts in an assembly.

We see no reason to change our $205 fair value estimate following narrow-moat rated Illinois Tool Works' second-quarter results. Therefore, the stock now trades relatively in line with intrinsic value, in our view. Second-quarter revenue of $4.01 billion was slightly lower than our expectations of $4.14 billion, while GAAP EPS of $2.37 was also slightly under the $2.44 we were expecting during the quarter. Nonetheless, the company maintained its guidance, and our long-term thesis remains intact. After some puts and takes in our model, we now expect full-year GAAP EPS of $9.21, or a penny over the midpoint of the guide. That said, we currently model at the high end of the revenue guide ($15.8 billion), and the low end of the operating margin guide (24.0%). The latter is due to continuing supply chain concerns we have.

We view Illinois Tool Works as a well-run collection of moaty businesses. The company focuses on niche markets, with most of its activities centered on resolving its most valuable customers’ pain points. ITW’s products and services are designed to reduce customers’ costs, either through ease of use, which cuts down on training costs, ensuring compliance with environmental and safety standards through quality products, or eliminating steps in a manufacturing process or parts in an assembly.

Narrow-moat-rated ITW had a solid first quarter, but nothing in its latest results materially alters our long-term view. While management raised its top-line and EPS guidance, we were already modeling at the top end of ITW’s 2022 forecast. We made some modest adjustments, including raising our full-year organic revenue outlook by a percentage point to 10% and bringing down our full-year margin expectations by 40 basis points to 24.6%. One could argue that top-line guidance seems a bit conservative, but we remain within guidance, given the current economic uncertainty.

We view Illinois Tool Works as a well-run collection of moaty businesses. The company focuses on niche markets, with most of its activities centered on resolving its most valuable customers’ pain points. ITW’s products and services are designed to reduce customers’ costs, either through ease of use, which cuts down on training costs, ensuring compliance with environmental and safety standards through quality products, or eliminating steps in a manufacturing process or parts in an assembly.