Is Illinois Tool Works Inc (NYSE:ITW) Worth $144.49 Based On Intrinsic Value?
Today I will be providing a simple run-through of the discounted cash flows (DCF) method to estimate the attractiveness of Illinois Tool Works Inc (NYSE:ITW) as an investment opportunity. If you want to learn more about this method, the basis for my calculations can be found in detail in the Simply Wall St analysis model. Also note that this article was written in May 2018 so be sure check the latest calculation for Illinois Tool Works here.
Crunching the numbers
I’ve used the 2-stage growth model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second ‘steady growth’ period. Firstly, I use the analyst consensus forecast of ITW’s levered free cash flow (FCF) over the next five years and discounted these values at the rate of 9.8%. This resulted in a present value of 5-year cash flow of US$11.33B. Want to understand how I calculated this value? Check out our detailed analysis here.
The graph above shows how ITW’s top and bottom lines are expected to move going forward, which should give you an idea of ITW’s outlook. Now we need to calculate the terminal value, which is the business’s cash flow after the first stage. I’ve decided to use the 10-year government bond rate of 2.8% as the steady growth rate, which is rightly below GDP growth, but more towards the conservative side. The present value of the terminal value after discounting it back five years is US$28.84B.
The total value is the sum of cash flows for the next five years and the discounted terminal value, which results in the Total Equity Value, which in this case is US$40.17B. In the final step we divide the equity value by the number of shares outstanding. This results in an intrinsic value of $118.59, which, compared to the current share price of $144.49, we see that Illinois Tool Works is fair value, maybe slightly overvalued at the time of writing.
Next Steps:
Valuation is only one side of the coin in terms of building your investment thesis, and it shouldn’t be the only metric you look at when researching a company. What is the reason for the share price to differ from the intrinsic value? For ITW, there are three essential factors you should further examine:
Financial Health: Does ITW have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
Future Earnings: How does ITW’s growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of ITW? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
PS. Simply Wall St does a DCF calculation for every US stock every 6 hours, so if you want to find the intrinsic value of any other stock just search here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
