We issued an updated research report on Illinois Tool Works Inc. ITW on Jun 7. While the industrial machinery maker is well placed to reap benefits of its initiatives and shareholder-friendly policies, it faces headwinds that can restrict growth in the near term.
The company currently carries a Zacks Rank #3 (Hold) and has a market capitalization of approximately $47.9 billion.
Below we discussed why it will be prudent for investors to hold on to this stock for now.
Factors Favoring Illinois Tool
Strategic Actions: In 2012, the company introduced the Enterprise Strategy — including Business Structure Simplification, Portfolio Management and Strategic Sourcing. While Business Structure Simplification and Portfolio Management strategies helped in strengthening Illinois Tool's organic sales, Strategic Sourcing aided in managing costs and improving margins.
Enterprise Strategy boosted first-quarter 2019 margin by 100 basis points while similar contributions are predicted for the full year.
Shareholder-Friendly Policies: The company effectively uses capital for making acquisitions, growing investments and rewarding shareholders handsomely. For rewards, it pays dividends and buys back shares. It is worth mentioning here that it increased the quarterly dividend rate by 28% and announced a $3-billion share buyback program in August 2018.
In the first quarter of 2019, the company repurchased shares worth $375 million and paid dividends totaling $328 million. In 2019, it anticipates buying back roughly $1.5 billion or more shares.
Divestment Plans: Of the total 87 business divisions, Illinois Tool believes that seven divisions are challenged by long-term growth. It aims to divest these seven divisions in the best interest of shareholders.
The company believes that the potential divestitures of these divisions, as and when completed, will boost organic sales growth by 50 bps and add 100 bps to its operating margin. Earnings impact will likely be neutral.
Factors Working Against Illinois Tool
Top-Line Woes: The company’s top line in the first quarter of 2019 declined 5.1% year over year and lagged the Zacks Consensus Estimate by 2.3%. Organically, sales were down 1.5%. The Automotive OEM segment’s organic performance was adversely impacted by fall in auto builds in China, North America and Europe. In addition, organic performance was weak in Test & Measurement and Electronics, Polymers & Fluids, Construction Products, and Specialty Products segments.
The company expects organic revenue growth of 0.5-2.5% in 2019, reflecting downward revision from previously stated 1-3%. The revised projection assumes first-quarter weakness. Total revenues are likely to be $14.5-$14.8 billion, down from $14.8-$15 billion mentioned earlier.
Forex & Cost Woes: Geographical diversification is reflective of a flourishing business of the company. However, this diversity exposed it to headwinds arising from geopolitical issues and unfavorable movements in foreign currencies. In the first quarter of 2019, forex woes adversely impacted its sales growth by 3.4% and earnings by 7 cents per share.
The company predicts forex woes to adversely impact earnings by 6 cents per share in the second quarter of 2019.
Also, it predicts that high tax rate will be troubling in 2019, with the adverse impacts likely to be lower in the second half of the year compared with the first half.
Share Price Performance & Lowered Estimates: In the past three months, the company’s share price has increased 5.3% against the industry’s growth of 6.3%.
Also, earnings estimates for the company have been lowered in the past 60 days. The Zacks Consensus Estimate is currently pegged at $7.94 for 2019 and $8.41 for 2020, reflecting decline of 0.3% and 0.5% from the respective 60-days-ago figures.
Illinois Tool Works Inc. Price and Consensus
Illinois Tool Works Inc. price-consensus-chart | Illinois Tool Works Inc. Quote
Stocks to Consider
Some better-ranked stocks in the industry are Chart Industries, Inc. GTLS, DXP Enterprises, Inc. DXPE and Dover Corporation DOV. While Chart Industries currently sports a Zacks Rank #1 (Strong Buy), DXP Enterprises and Dover carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
In the past 60 days, earnings estimates for all these three stocks have improved for the current year. Further, average earnings surprise for the last four quarters was positive 16.56% for Chart Industries, 48.47% for DXP Enterprises and 8.61% for Dover.
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