Illinois Tool Works (ITW) may see sales slow down this year, but the company has an incredible management team that knows how to increase margins. If you are unfamiliar with this company, I believe it is one to look at. Let's take a look at how it was able to have a poor sales performance this first quarter of 2013 but still increase in value.
How is this for irony? Illinois Tool Works reported a 27% decline in first-quarter net income as revenues fell 8%, but shares rose more than 3% toward the end of the day of trading after the announcement. What caused this to happen? At the same time it said its operating margins had improved. Operating margins are basically a measure of how much a company's revenue the company gets to keep.
The company sold its "decorative surface business" and did not include this in this last quarter's numbers, which saw gross revenues fall by 1.8% to $428 billion. But its operating margins improved to 16.5% the net is what made the stock rise. Who would have thought! For most of the first-quarter, investors have reacted to and focused on growth as companies have reported, but with ITW, better margins were all it took to lift the stock.
Gross margins rose a point from the previous year and a half point from the previous quarter and exceeded all sell side expectations! A simple explanation to this may be that investors see management as able to meet its goals because improving margins have been targeted by management policies like centralized sourcing. Even though operating income was down by 5%, it improved by 1% when it was adjusted. And the company was able to do this in a market that has seen a pretty heavy downturn in industrial demand. Other competitors like General Electric (GE) and Honeywell (HON) have also seen turn downs.
Management lowered its target for the year a bit and I guess this is understandable considering it missed its target this quarter. Many companies, including ITW, have expressed the belief that the second half of the year is going to be better for them and industrial demand should pick up. On one hand, since so many companies believe it's going to happen, that may give it some legs. However, it could be even more damaging if all these companies are wishing for something that will not come to fruition.
I believe Illinois Tool Works has a very strong management team and even though it has more exposure to Europe than some of its peers that I have already mentioned in this article, the company's progress in margin improvements cannot be ignored. Even though the stock continues to appear a bit expensive, I am of the opinion that it is very well run and isn't a bad company to have in your portfolio. The only risk I can see is if we have huge market erosion that causes the stock tank, I doubt this is going to happen.
After building a base in the second half of December 2012, the stock appears to be moving sideways in a broad peak and valley trading channel. The RSI indicator has cruised right along in the middle as you can see the highs and lows move in between that middle band which shows the stock is moving sideways. I don't see any progress there. If there is any bullish progress, I would have to say that I can observe it in the MACD indicator. It looks like momentum is picking up for the stock. It just recently pushed through the "zero" line after spending most of the consolidation below that line. This shows me that bullish momentum could be picking up. Since the stock just pushed through the upper Bollinger band, I believe we should see a pullback a bit.