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ITW: Strategic Review of Packaging

Zacks Equity Research

As part of its key enterprise initiatives, industrial tool maker, Illinois Tool Works Inc. (ITW) recently communicated that it has started searching for suitable alternatives for its Industrial Packaging segment.

The review process will likely last throughout 2013 and includes a sale or a spin-off of the segment as its favored options.
The Industrial Packaging segment engages in the production of steel, plastic, and paper products used for bundling, shipping and protecting transported goods. In 2012, roughly $2.4 billion or 13.5% of the company’s total revenue was derived from this segment.

This step is the second of its kind in a row after the company divested its Decorative Surfaces division in October, 2012. The business sale fetched the company roughly $1.05 billion along with a 49% stake in Wilsonart International Holdings, LLC, a new company formed after the divestment.

Such strategic selling of not so profitable businesses works well for the future growth of the company by freeing resources that can be invested for development of core businesses. Based on its portfolio management initiative along with business simplification and strategic sourcing, the company aims to achieve organic growth of about 200 basis points above industrial production by 2017.

Operating margins and return on invested capital are targeted to be above 20% by 2017. Free cash flow conversion is expected to be 100% and earnings per share CAGR to be 12% beyond 2017.

Illinois Tool Works Inc. currently has a Zacks Rank #4 (Sell). Other stocks to watch out for are Altra Holdings, Inc. (AIMC) having a Zacks Rank #1 (Strong Buy) while Atlas Copco AB (ATLKY) and Metso Corp. (MXCYY) each has a Zacks Rank #2 (Buy).

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