Investors seeking exposure in the machinery general industry may find Illinois Tool Works Inc. ITW as an attractive investment option. Based in Glenview, IL, the company has solid fundamentals and its revised earnings projections speak well of its growth opportunities.
The company, with a $74.5-billion market capitalization, engages in manufacturing specialty systems and engineered products. The company presently carries a Zacks Rank #2 (Buy). It belongs to the Zacks Manufacturing – General Industrial industry, which comes under the ambit of the Zacks Industrial Products sector. The industry is among the top 25% (with the rank of 62) of more than 250 Zacks industries.
In the past three months, the company’s shares have gained 10.5% against the industry’s decline of 37.2%. Notably, the S&P 500 has expanded 10.8%, while the sector declined 10.6% during the same timeframe.
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Below we discussed why Illinois Tool is a worthy investment option now.
Earnings Performance and Projections: The company delivered impressive results in the first quarter of 2021. Its earnings exceeded estimates by 11.1% and sales surprise was 3.3%. On a year-over-year basis, the bottom line expanded 19.2% on sales and margin growth.
In the quarters ahead, the company is poised to benefit from solid demand, diversified business structure, healthy liquidity position and enterprise strategy. For 2021, the company anticipates earnings of $8.20-$8.60 per share, rising from the previously mentioned $7.60-$8.00. The new expectation suggests year-over-year growth of 27% at the mid-point.
Top-Line Projections & Operating Margin: In the first quarter of 2021, the company’s revenues increased 9.8% year over year, with 6.1% coming in from organic sales and 3.7% from movements in foreign currencies.
For 2021, Illinois Tool anticipates total year-over-year revenue growth of 12-14%, higher than 9-12% growth mentioned earlier. Organic sales are projected to grow 10-12% versus the previously mentioned 7-10%. Forex impacts on sales are expected to be 2%.
Operating margin is anticipated to be 25-26% for 2021, with 100 basis points (bps) coming in from enterprise initiatives. Notably, the enterprise strategy boosted operating margin by 120 bps in the first quarter of 2021.
Shareholders’ Rewards: Illinois Tool has been rewarding its shareholders with dividend payments and share buybacks over time. In the first quarter of 2021, it distributed dividends of $361 million to its shareholders, reflecting an increase of 5.6% from the year-ago quarter. Notably, the company announced a hike of 6.5% in its quarterly dividend rate in August 2020. The current dividend rate is $1.14 per share.
In addition, the company repurchased shares worth $250 million in the first quarter of 2021. A new share buyback worth $3 billion was approved by the board of directors this May. The approval is an increment from the $3-billion share buyback program approved in August 2018, of which $1 billion was left at the end of the first quarter of 2021.
A healthy cash flow position will likely help it reward its shareholders.
Earnings Estimate Revisions: The company’s earnings estimates have increased in the past 60 days. Currently, the Zacks Consensus Estimate for its earnings is pegged at $2.01 for the second quarter of 2021, reflecting an increase of 6.9% from the 60-day-ago figure.
Illinois Tool Works Inc. Price and Consensus
Illinois Tool Works Inc. price-consensus-chart | Illinois Tool Works Inc. Quote
Also, earnings estimates are pegged at $8.40 for 2021 and $9.17 for 2022, suggesting increases of 5.9% and 6.3% from the 60-day-ago figures, respectively.
Other Key Picks
Some other top-ranked stocks in the industry are Tennant Company TNC, EnPro Industries, Inc. NPO and Dover Corporation DOV. While Tennant currently sports a Zacks Rank #1 (Strong Buy), both EnPro and Dover carry a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
In the past 30 days, earnings estimates for the stocks have improved for the current year. Further, earnings surprise for the last reported quarter was 82.81% for Tennant, 44.21% for EnPro Industries and 23.13% for Dover.
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