Because Illinois Tool Works (ITW) continues to move up slowly and reported a good 1Q 2012, analysts are favorably looking at the stock. Jefferies Capital increased its price target for the buy-rated company from $62 to $65 following Q1 results. It beat Jefferies estimates ($0.97 to Jefferies $0.95). Illinois Tool is having its EPS estimates increased as the company continues a share repurchasing program and continued margin expansion.
With an upside in construction, the company is expected to continue to move up. The growing weakness in the company's bullish movement is understandable. Even though construction spending was up 5.8 percent compared to February 2011, U.S. construction spending recorded a large dip, biggest in seven months because investment in private and government projects fell. Economists had expected construction spending to rise 0.6 percent. This was the second straight month of declines in construction outlays. With auto sales slowing down overseas, this is another possible reason for the weakened growth. Its Transportation segment which accounts for 15% of the revenue, sells 84% of its products to automotive OEM's.
Negative Divergence in RSI could mean consolidation before it continues up or a reversal taking place soon. Now, what could cause a reversal? A slowdown in revenue could cause this. But with construction up 5.8% year over year, this looks more like a consolidation period before it moves up. And with Jefferies increasing its Price Target to $65 (while it trades presently at 56.39), the sideways movement looks more and more like a consolidation.
Because we see this as consolidation, we are still bullish on the stock that is presently trading at $56.39. We like a short term bullish options play on the stock with extra protection for time decay.
The Options Play
- Buy a December 2012 call with a strike of '57.5' (priced at $3.60
- Sell a December 2012 call with a strike of '60' (priced at ($2.40)
- Net Debit to Start: $1.20
- Maximum Profit: $1.30
Reasoning behind the Trade
- The stock looks like it is consolidating on weakness.
- We expect construction and auto sales to pick back up before years end which will increase revenue.
- We are well within the price target of the stock on this play.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.