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Illinois Tool Works: One Of The Best Buys At Lower Prices

May 07, 2020 6:14 PM ETIllinois Tool Works Inc. (ITW)8 Comments


  • Illinois Tool Works just reported its first-quarter earnings, which came in above expectations.
  • The company saw weak organic sales growth, withdrew its guidance but maintained strong Q1 margins.
  • While I expect another wave of selling, ITW is one of the best stocks to buy lower due its margin expansion and solid balance sheet.

My previous article covering Illinois Tool Works (NYSE:ITW) could not have started any better. I wrote about a pending breakout after bottoming economic growth would further support the company's sales. Unfortunately, while the stock price indeed started to break out, the COVID-19 crisis has hit this stock like a wrecking ball. The just-released Q1 results were better than expected as margins remained stable in a challenging environment. For Q2, the company expects a sales implosion as its cyclical business was impacted like never before. Fortunately, the company is well-positioned to face these challenges, and, as a result, I have put the stock on my watchlist. While I do not expect a V-shaped recovery, I think the company is currently shaping up to be a great long-term buy at lower prices.

Source: Illinois Tool Works

Q1 Was Bad, Q2 Will Be Worse

As usual, I will start this article by taking a look at earnings per share. The just-released results showed a decline of 2% to $1.77 per share. That's $0.06 above expectations, but ends the three-quarter growth streak the company started in the second quarter of 2019.

Source: Estimize

While the largest COVID-19 impact will be visible in Q2 earnings - as the shutdown started at the end of March, the company saw weakness across the board. For example, sales declined by 9% in the first quarter as organic sales were down 6.6%. Foreign currency translation deduced 150 basis points. Divestitures accounted for a 100 basis points decline. Fortunately, and this is why the company managed to do so well after the global growth peak of Q1/2018, the operating margin was flat at 23.6%. Enterprise initiatives (+120 bps), price/cost (+20 bps), and others (+20 bps) were able to offset volume leverage (-150 bps).

As the overview below shows, the operating margin

This article was written by

Leo Nelissen profile picture

Leo Nelissen is an analyst focusing on major economic developments related to supply chains, infrastructure, and commodities. He is a contributing author for iREIT on Alpha.

As a member of the iREIT on Alpha team, Leo aims to provide insightful analysis and actionable investment ideas, with a particular emphasis on dividend growth opportunities. Learn More.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (8)

Hukis DGI profile picture
Spot on! ITW is around 6% of my portfolio with cost basis about 129. I built the position during H2/2018.

Healty balance sheet, quite stable cash flow and multiple legs to build on. Like 3M, all segments are profitable with comparable margins.

I would even give the management positive feedback and trust to the strong company culture for great future.
Vandooman profile picture
Agree. ITW has been very good at bolt-on acquisitions where they add a new product line and impose their management practices.
Vandooman profile picture
Good analysis as usual Leo. I don't really care what kind of recovery it is as long as the economy recovers. Within the next 12 months we will have a vaccine and it may be sooner. If good news emerges the dip you are waiting for may not happen. I am content to hold a great company and as Charlie Munger used to say, just sit on your ass. It is interesting that we often hear about buying brilliantly on a dip but how often do you hear someone say, I missed the upside surprise. The market went by me. Upsides are often surprises.

It is a good time to invest in great companies. Just bought some Visa, AMGEN, Smuckers, Clorox, Medtronics, and especially Qualcom. Also like Morgan Stanley. The old tech guard of Microsoft, Cisco, Intel and Texas Instruments are attractive. Also retailers who are open like WMT, TGT, HD and LOW. Master Card is also attractive.
Leo Nelissen profile picture
Thank you very much. I agree although I don't think it is going to be an easy ride to new all-time highs. Interesting stocks you bought. I like a lot of them as well.
georgefelix75 profile picture
Nothing cheap about it.
Jeremy Blum profile picture
You are correct that ITW is one of the most cyclical companies out there. Its also trading at a very expensive 22x trailing pre Covid 19 earnings. If you think we will have V like recovery, be my guest. But that is unlikely. The virus will be with us well into 2021 before we get a vaccine. Also, everybody is chopping their capex budgets and ITW partially depends on capex spending. Their operating results are getting hit harder than most, yet their stock price is trading like nothing happened. Put this one away in a drawer and don’t look again until well into 2021.
Vandooman profile picture
The vaccine is now expected to come faster but we will see. I paid $40 so I am not dying to pay capital gains on a sale. My yield on book cost is $10.6%. I dealt with ITW as a banker and they have great management. So it is in the drawer and I can wait. We should get the virus more or less behind us in the next year. If it takes two years for ITW to recover and not one, who cares? Great company.
Jeremy Blum profile picture
It is a well managed company, just trading way too high for the current environment. If you bought at $40, I understand its best to hold and avoid the capital gains tax.

However, even when a vaccine comes it will take a while to get it out worldwide. Even after that, there will be too many companies needing to repair their balance sheet to spend a lot. Same with consumers. This recession will last a while and ITW's earnings will be way off for several years.
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