Illinois Tool Works is a solid manufacturing bet on the global economy

A Member of Pat McKeough’s Inner Circle recently asked for his advice on Illinois Tool Works, a company that makes specialized industrial equipment and consumables while offering related services.

Pat likes the company’s sound balance sheet, consistently rising revenues and earnings and solid 2.3% yield. It’s also actively buying back its own shares.

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Illinois Tool Works (Symbol ITW on New York; www.itw.com) is a multi-industry manufacturer operating in over 53 countries. Known as ITW, 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 has a portfolio of more than 18,500 granted and pending patents.

To generate value for investors, the company operates in seven industry segments: automotive products (19% of revenue); test, measurement and electronics (18%); food equipment (15%); construction products (13%); polymers & fluids (12%); welding (12%); and specialty products (11%).

In 2012, ITW changed its strategy to add more shareholder value: it aggressively exited businesses and product lines focused on commodity-like markets.

As a result, the company now concentrates on markets and product lines in which profit margins can be sustainably maintained by quality and service differentiation. ITW also aims to implement what it calls a “decentralized, entrepreneurial culture that can flexibly respond to market demands.”

The company’s overall revenue rose 3.8%, from $13.6 billion in 2016 to $14.1 billion in 2019. Revenue then fell 10.9% in 2020 to $12.6 billion as the pandemic hurt the company’s customers. Revenue rebounded 15.0% in 2021 to $14.5 billion. Then, in 2022, it moved up a further 10.2%, to $15.9 billion.

Inner Circle: Earnings continue rising with strong recent results for Illinois Tool Works

By concentrating on value-added products, the company saw its earnings rise 23.9%, from $2.0 billion in 2016 to $2.5 billion in 2019. On a per-share basis, earnings jumped 35.8% over the same period, from $5.70 to $7.74, thanks to share buybacks. Earnings then dropped 16.3% in 2020, to $2.1 billion, or $6.66 a share. In 2021, earnings climbed 27.7%, to $2.7 billion, or $8.55 a share. That was followed by an earnings increase of 12.6% in 2022, to $3.0 billion, or $9.80 a share.

In the quarter ended December 31, 2022, ITW’s revenue increased 7.9%, to $3.97 billion from $3.68 billion a year earlier. Earnings jumped 48.9%, to $907 million, or $2.96 a share, from $609 million, or $1.94.

ITW’s balance sheet is sound: its long-term debt of $6.2 billion is just 8.5% of its market cap. The company also holds cash of $708 million.

The company’s investors currently receive a quarterly dividend of $1.31 per share, for a yield of 2.3%.

ITW needs an expanding global economy to show consistent sales growth. Meanwhile, ongoing share buybacks should continue to pay off with higher per-share profits.

Recommendation in Pat’s Inner Circle: Illinois Tool Works is a hold.

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Pat McKeough

A professional investment analyst for more than 30 years, Pat has developed a stock-selection technique that has proven reliable in both bull and bear markets. His proprietary ValuVesting System™ focuses on stocks that provide exceptional quality at relatively low prices. Many savvy investors and industry leaders consider it the most powerful stock-picking method ever created.

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