Illinois Tool Works: Keep an Eye on This One

Illinois Tool Works Inc. (ITW) is a company on the move. This manufacturer of diversified industrial goods is currently aggressively growing its business, primarily through acquisitions of both domestic and international companies -- in fact, the company has acquired 56 companies over the past year alone. And ITW's revenue has increased in kind; the company has posted double-digit growth for the past two quarters. This trend, which has been steady over the past two years, looks to continue as ITW seems to be staying the course with its growth-by-acquisition strategy.

More importantly, ITW knows what to do once it acquires a company. The company's management operates under what is known as the 80/20 principle: That is, 20% of a company's customers generate 80% of a company's profits. This helps ITW focus attention on its most profitable customers, which helps it allocate resources where they will do the most good, and keep its margins high.

ITW combines its aggressive acquisition plan and the 80/20 principle in an unusual, but highly successful, way: each newly acquired company is broken down into small units that continue to service the existing customers, which assure that those closest to the customers are the people who know how best to make them happy. And this strategy seems to work: on average, ITW increases the operating margins of its acquired businesses by 100%.

There are, of course, worries that any industry that is tied to U.S. construction is at risk in this fragile housing market, but Goldman Sachs doesn't see any reason to worry here. First, while ITW's engineered products division, which accounts for roughly 47% of revenue, includes many products involved with the construction industry, it also includes other products like auto parts and industrial fasteners, while more than half of the company's income is derived from sales and manufacture of specialty systems, like food and industrial equipment, packaging and more.

More to the point, however, ITW has been able to easily offset the current downturn in the construction market with its international sales, which make up almost 45% of its revenue, and this looks to continue as ITW expands in the booming construction markets of China and India.

ITW's annual analyst meeting is set for November 30, and while the company is not expected to delivery specific EPS guidance until January, it is expected that we will see reports on ITW's early base business expectations at that point, which may drive the price up. Keep an eye on this one -- your best bet may be to pick it up between now and then.

Type of Stock: Illinois Tool Works is a global industrial company that operates over 750 businesses in 49 countries around the world.

Price Target: Goldman is predicting a $63 price over the next 12 months -- and I agree.