Seeking Alpha
Research analyst, growth, value, IPOs
Profile| Send Message|
( followers)  

Last week, Illinois Tool Works (ITW) made a small acquisition that could pay off huge for the company. The company purchased the assets of Vesta, a Chinese kitchen equipment maker. The deal, which does not include financial details, was completed as a purchase from private equity firm Actis. I believe the purchase will complement Illinois Tool Work's strong food equipment division and also power sales in the Asia/Pacific region.

Vesta manufactures fryers, griddles and ovens in China. The company has 900 employees working at two factories. Vesta uses the brand name Justa and sells to four and five star hotels and chain restaurants in the Asian region.

The purchase of Vesta will also significantly boost already growing sales in Illinois Tool Works Asia/Pacific region. In fiscal 2012, 20% of total revenue came from the region. This was a significant boost from the 8% revenue representation of the region in fiscal 2011. In the most recent first quarter, the Asia/Pacific region grow organic sales by 0.5%. More importantly though, sales in China grew 10.2% from the prior year.

In the first quarter, food equipment sales declined 1.2% to $467 million. The segment saw an operating margin rate of 16.7%, which is down slightly from the fiscal 2012 rate of 17.1%. In fiscal 2012, food equipment sales represented 11% of total revenue. Of food equipment sales, 65% came from equipment and tools, while the remaining 35% was from service and parts.

Illinois Tool Works is restructuring its company, which will further increase the total revenue that food equipment is responsible for. The company sold over several business units in 2012. Decorative surfaces was sold for $1.05 billion after posting sales of $1.1 billion in fiscal 2012. The finishing business was also sold for $650 million, after sales of $375 million. The company is currently considering options to sell or spin off its industrial packaging business, which represented 14% of the company's total revenue. Illinois Tool Works has restructured to shrink its pre-existing 800 divisions into 150. The move should help cut costs and in turn, boost profit margins.

While waiting for growth from this acquisition and other potential catalysts, Illinois Tool Works shareholders are being rewarded with dividends and share buybacks. The current dividend is around 2.5% and continues to grow. Illinois Tool Works has increased its dividend each of the last fifty years. Each year, Illinois Tool Works also aims to repurchase $300 to $500 million worth of its own stock.

Goldman Sachs recently downgraded shares of Illinois Tool Works. The firm thinks that earnings will grow at slower rates due to slower organic growth. Goldman lowered its overall price target to $69, which is in line with current share prices. The firm sees Illinois Tool earning $4.20 in fiscal 2013. Goldman cut fiscal 2014 and fiscal 2015 earnings estimates to $4.60 and $5.20 respectively.

Analysts on Yahoo Finance see Illinois Tool Works posting earnings per share of $4.23 in fiscal 2013 and $4.65 in fiscal 2014. Revenue is expected to decline 6.9% in fiscal 2013 and increase 3.5% in fiscal 2014. I believe these estimates are on the conservative side for fiscal 2014 with a full restructure plan in place and the possibility of more divestures. Illinois Tool Work's own 2013 guidance calls for earnings per share of $4.25.

The new acquisition is being underfollowed on Wall Street. Let this be your opportunity to buy into an exciting company with growing dividends, cheap valuation, and exciting international expansion.

Source: Illinois Tool Works Chinese Acquisition Will Boost Shares Going Forward