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Illinois Tool Works Remains Neutral

Zacks Equity Research

We recently maintained our recommendation on Illinois Tool Works Inc. (NYSE:ITW) at Neutral, expecting the company to perform in line with the broader market.

Why at Neutral?

Focus on the development of new and improved products as well as broadening the application of established products has made Illinois Tool Works one of the leading manufacturers in the industrial products and equipment industry. The company provided a year-to-date return of 33.5% and is expected to grow earnings by 9.3% in the next 5 years.

Illinois Tool Works has undertaken three long-term strategic initiatives that include Business Simplification, Strategic Sourcing and Portfolio Management. These initiatives contributed roughly 80 basis points to the company’s operating margin improvement in the third quarter 2013.

In its recently held Analysts and Investor Day, Illinois Tool Works provided an update on its five-year enterprise strategy. The company claims to be progressing well having divested 20 non-core businesses since 2011 and is aiming to divest 25% of 2011 revenues by 2014.

The number of operating divisions has been shortened, leading to overall margin expansion. Cost savings of $600–$800 million are targeted through business structure simplification and strategic sourcing strategies.

Additionally, at its Analysts Day, Illinois Tool Works provided its 2014 guidance including earnings per share in the range of o$4.30–$4.50, organic revenue growth within 2%–3% and operating margin of roughly 19%. Rewards to shareholders will amount to $700 million in the form of dividend payments and $1.8 billion as share repurchases. Investment in acquisitions is predicted to be roughly $375 million.

Though positive on the long-term growth prospects of Illinois Tool Works, we remain wary of fourth quarter results due to be released on Jan 28, 2014. The company’s performance in the first three quarters of 2013 (ended Sep) were below/in line with the Zacks Consensus Estimate with an average negative earnings surprise of 4.0%.

Other Stocks to Consider

Illinois Tool Works has a $36.7 billion market capitalization and carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the industry include Middleby Corp. (NASD:MIDD), Altra Industrial Motion Corp. (NASD:AIMC) and Barnes Group Inc. (NYSE:B). While Middleby holds a Zacks Rank #1 (Strong Buy), both Altra Industrial Motion and Barnes Group carry a Zacks Rank #2 (Buy).

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