Packaging giant’s safety-locking system set to lift sales

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Cannabis-Connected

This U.S.-based company manufactures a diverse range of products—from restaurant appliances to consumer packaging. That product line includes an industry-leading collection of re-sealable plastic bags for food and other products. The company has just unveiled a new slider locking system for its bags, one that’s even harder for young children to open.

The new feature (which lends itself to the growing cannabis industry) could help boost the company’s stagnant revenue and add to its recent earnings jump.  


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Illinois Tool Works Inc., $128.71, symbol ITW on New York (Shares outstanding: 331.8 million; Market cap: $42.7 billion; www.itw.com), is a multi-industry manufacturing company operating in 56 countries. Known as ITW, it has roughly 50,000 employees.

The company’s diversified range of industrial products includes aerospace technology, bridges, wind turbines, restaurant appliances, packaging solutions, electronics, deep-sea welding products, and a range of automotive components such as fasteners, door handles, powertrain, and refuelling systems.

ITW operates in seven industry segments: automotive products (22.9% of revenue), food equipment (14.8%), laboratory testing equipment (14.5%), welding equipment (10.7%), polymers & fluids (12.0%), construction products (11.7%), and consumer packaging & other specialty products (13.6%).

Through its Zip-Pak division, ITW makes a variety of re-sealable plastic bags for food other products. The company recently unveiled a new slider, called Safety-Lok, which is difficult for young children to open. That would make it ideal to store medical and recreational cannabis. For now, however, ITW will avoid directly associating its packaging with cannabis until more jurisdictions legalize the drug.

In 2012, the company undertook a strategic re-positioning in which it aggressively exited businesses and product lines that were operating in what it saw as commoditized markets. ITW is now focused on markets and product lines in which profit margins can be sustainably maintained by quality and service differentiation. This strategic re-positioning also aims to implement a “decentralized, entrepreneurial culture that can flexibly respond to market demands.”

ITW’s revenue has remained relatively flat over the past five years as it divested itself of businesses and product lines. From $14.1 billion in 2013, revenue rose only 1.4% to $14.3 billion in 2017. However, as a result of focusing on higher-profit-margin products, earnings rose 43.9% over the same period, from $1.6 billion in 2013 to $2.3 million in 2017 (2014: $1.9 billion; 2015: $1.9 billion; and 2016: $2.0 million). ITW has been steadily buying back its stock over the past five years. As a result, earnings per share jumped 157.8%, from $3.63 in 2013 to $6.78 in 2017.

Since the change in strategy, ITW has also raised its dividend by over 100%.

In the quarter ended September 30, 2018, revenue was unchanged from the previous year at $3.6 billion. Earnings per share rose 2.7%, to $1.91 from $1.86.

ITW’s balance sheet is sound: its long-term debt of $6.1 billion is just 14% of its market cap. It also holds cash of $1.6 billion, or $4.77 a share.

The company faces rising raw material costs, and the high U.S. dollar hurts the contribution of its foreign operations. ITW needs an expanding global economy to keep showing sales growth. However, its restructuring and ongoing share buybacks should continue to pay off with higher per-share profits.

The stock currently trades at 16.0 times the company’s forecast 2019 earnings of $8.05 a share. ITW raised its quarterly dividend by 28.2% with the October 2018 payment, to $1.00 from $0.78. The shares yield 3.0%.

Illinois Tool Works is okay to hold.

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