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Illinois Tool Provides Long-Term Goals, Initiates 2019 View

Illinois Tool Works Inc. ITW hosted Investors Day 2018 on Dec 7. This Industrial tool maker discussed its Enterprise Strategy, long-term growth targets and also initiated forecast for 2019.

Enterprise Strategy

Illinois Tool introduced its Enterprise Strategy in 2012.

Before we discuss major enterprise initiatives undertaken by the company, it’s worth noting here that its business model comprises 80/20 Front-to-Back Process, Customer-Back Innovation and Decentralized Entrepreneurial Culture. On the back of these practices, the company gained competitive advantage in the industries it serves. It also seems well-positioned for delivering healthy returns in the long term.

As part of the enterprise initiatives of the company, similar products were brought under one roof through Business Structure Simplification. Acquisitions, as well as the disposition of non-core assets, were done as part of the Portfolio Management initiative. The third — Strategic Sourcing — equipped the company well to manage its raw materials and other costs, and benefited its margins.

Following the implementation of the Enterprise Strategy, the company’s operating margin is predicted to increase from 15.9% in 2012 to 24-25% in 2018. It’s worth noting here that Enterprise Strategy is anticipated to add in excess of 100 basis points (bps) to operating margin in 2018. In addition, after-tax return on invested capital (“ROIC”) will likely grow from 14.5% in 2012 to 27-28% in 2018 and earnings per share will likely grow from $3.21 in 2012 to $7.55-$7.65 in 2018.

Long-Term Targets

For the five years from 2019 to 2023, the company anticipates gaining from its solid product portfolio and growth strategies. From 2019 and beyond, it expects to achieve organic revenue growth of 3-5%, including 30 bps impact from product line simplification (PLS) initiatives. Additionally, operating margin is predicted to be roughly 28%, incremental margin is likely to be 35% and earnings per share to grow 7-10%.

Further, after-tax return on invested capital is projected to be approximately 40%. Free cash flow will likely be more than 100% of net income. Dividend payout ratio will be roughly 50%.

Projections for 2019

In addition to the above discussion, Illinois Tool provided its financial guidance for 2019. The company anticipates earnings of $7.90-$8.20 per share, reflecting mid-point year-over-year growth of roughly 6% from $7.55-$7.65 guided in 2018.

Total revenues are projected to be $14.9-$15.1 billion, up from $14.7-$14.9 billion estimated for 2018. Organic sales will likely grow 2-4% in 2019, including flat results from Automotive OEM and 80 bps adverse impacts from PLS initiatives.

Operating margin will likely grow roughly 100 bps from 24-25% projected for 2018. Enterprise initiatives will add roughly 100 bps to operating margin. Further, the company stated that raw material cost inflation will be roughly 2-3% in the year, with pricing actions more than offsetting the impact on a dollar-for-dollar basis. Dilutive impact of material price inflation on operating margin will be less than 60 bps predicted for 2018. Tariff impact will likely be $60 million and the pricing actions will play a major role in offsetting its impact.

ROIC is predicted to grow 200 bps from 27-28% forecasted in 2018 and free cash is likely to represent more than 100% of net income. Share buybacks will total approximately $1.5 billion.

Zacks Rank & Stocks to Consider

With a market capitalization of $43 billion, Illinois Tool currently carries a Zacks Rank #3 (Hold). The company is poised to gain from high demand in North America, margin expansion, lower taxes and share buybacks. However, high costs of sales and forex woes remain concerning.

In the past three months, Illinois Tool’s shares have decreased 8.5% against the industry’s 12% decline.

Moreover, earnings estimates on the stock for 2018 have been lowered by eight brokerage firms and raised by one in the past 60 days. Likewise, earnings estimates for 2019 were decreased by nine firms and raised by two. Currently, the Zacks Consensus Estimate for earnings stands at $7.60 for 2018 and $8.10 for 2019, reflecting decline of 0.4% and 1.8% from the respective 60-day-ago tallies.

Illinois Tool Works Inc. Price and Consensus

Illinois Tool Works Inc. Price and Consensus | Illinois Tool Works Inc. Quote

Some better-ranked stocks in the industry are DXP Enterprises, Inc. DXPE, EnPro Industries, Inc. NPO and Luxfer Holdings PLC LXFR. All these stocks currently sport a Zacks Rank #1 (Strong 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, positive earnings surprise for the last quarter was 17.95% for DXP Enterprises, 23.64% for EnPro Industries and 60.61% for Luxfer.

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