Illinois Tool Works Earnings: Enterprise Initiatives Drive Strong Margin Expansion

We raise our fair value estimate for narrow-moat Illinois Tool Works ITW 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.

Consolidated third-quarter sales narrowly missed our expectations. Despite flattish organic revenue year on year, operating margins inflated strongly, rising about 200 basis points year on year to 26.5%. These are best-in-class margins for an industrial company, which we think demonstrates the strength of Illinois Tool Works’ enterprise initiatives. These initiatives include Illinois Tool Works’ focus on serving its most impactful customers and building innovative solutions based on that customer demand. We point out that in contrast to competitors, Illinois Tool Works’ margins fully bake in any corporate and restructuring or mergers and acquisitions-related expenses (though the company didn’t incur the latter expenses during the quarter). Based on the strength of these initiatives, we expect GAAP EPS may even improve from last year’s result.

Price-cost was a 210-basis-point benefit, which continues the positive trend that began in this year’s first quarter. We expect Illinois Tool Works will exit the year on a positive price-cost basis, despite deflation in its commodity supply. Said differently, prices are sticking, which we think is a testament to its intangible asset moat source.