Illinois Tool Works Earnings Review

Diversified industrial Illinois Tool Works is acquiring a reputation for underpromising and overdelivering, and the latest fourth-quarter results only served to strengthen it. Its peer 3M Co. recently affirmed full-year 2017 guidance, and Illinois Tool Works did the same. Despite the excitement around what Donald Trump's election victory could mean for U.S. industrial output, management claimed its segments remained pretty much on track -- which suggests there might be some upside to current guidance. Let's take a look at another solid quarter, and how the company is set for 2017.


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Can Illinois Tool Works Stock Rise in 2017?

Illinois Tool Works Inc. rose by nearly a third in 2016, and the company's earnings prospects look good in 2017. On a risk/reward basis, however, the stock looks fully valued. While it looks cheap relative to peers like 3M Co or Lincoln Electric Holdings, Inc , it's not necessarily a good value in itself. Let's take a look at what you need to know before buying or selling the stock.

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Illinois Tool Works 2017 Outlook

Illinois Tool Works Inc.  management has cheered investors by underpromising and overdelivering with its 2012-2017 enterprise strategy plan. A combination of cost cuts and focusing on more lucrative activities via Product Line Simplification (PLS) has led to operating margin expansion, even within moderately growing end markets. It's largely the reason behind the stock's outperformance this year, but can the strong run continue? Let's take a look at the company's investor day guidance and outlook, and see what it means for investors.

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Illinois Tool Works Investment Analysis

With Illinois Tool Works and 3M Company now trading for valuations at or near historic highs,   it's time for investors to take a long hard look at whether they are still a good value. So let's analyze the key takeaways from Illinois Tool Works' latest earnings call, look at how and why the company is outperforming, and ask whether the stock is a good value or not.

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Illinois Tool Works Earnings Preview

It's not often a company lowers its full-year organic revenue guidance but increases its EPS guidance, but that's exactly what happened with Illinois Tool Works (NYSE:ITW) when it last gave results in July. In short, the company's stock-price performance has trumped its peers' thanks to its ability to expand margin.
Can the stock keep up its impressive run? With the earnings release coming up on Oct. 20, let's look at what the company needs to do.

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Illinois Tool Worls Earnings Analysis

Another quarter, another three months of margin expansion for Illinois Tool Works. After a difficult end to 2015 prompting reduced earnings guidance, management has turned momentum around and for the second quarter in a row has raised its guidance for full-year earnings per share. In truth, the guidance hike is more about internal execution and margin optimism than an improvement in the revenue outlook. That said, it's only really the welding segment that's disappointing right now; elsewhere there are signs of a growth recovery in the engineering-equipment manufacturer's end markets. Let's take a closer look at a nuanced quarter that needs some careful explaining.

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Caterpillar Inc or Illinois Tool Works

Illinois Tool Works versus Caterpillar ? At first glance, they appear strange bedfellows, but looking closely at their prospects reveals a lot about the current state of the industrial economy. The former is an all-purpose industrial with exposure to many parts of the economy, while the latter has heavy exposure to oil and gas, mining, and construction. They offer different things to different investors, but overall, which is the better value?

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Illionois Tool Works Helps Itself

In the last three months, the market has significantly bid up industrial stocks like Illinois Tool Works  and 3M Company , possibly in the belief that a recovery in industrial conditions would occur in the second half of 2016. Indeed, if a cyclical pickup occurs, then both companies are well placed to benefit. If they can generate margin expansion during bad times, then they are surely well situated for any upturn. That said, let's take a look at the tale of Illinois Tool Works' first-quarter results.

ITW data by YCharts.

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Illionis Tool Works or 3M Company Stock for 2016?

Illinois Tool Works  and 3M Company both delivered solid fourth-quarter earnings recently, and maintained their full-year guidance for 2016. Given the deterioration in the economy in the fourth-quarter that's no mean feat.  As a consequence both stocks are now outperforming the S&P 500 and the industrials sector -- measured in this case by the IShares US Industrials ETF. Does this make the stocks a buy?

MMM data by YCharts

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Illinois Tool Works Earnings Analysis

In common with its peer 3M Company, diversified industrial Illinois Tool WorkS reported a solid set of earnings that helped reassure investors who were fearful of an industrial recession. Both companies have been busy streamlining their businesses and managing to squeeze every bit of margin expansion possible from difficult end markets. Let's take a closer look at the earnings trends from Illinois Tool Works' fourth quarter.

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Illinois Tool Works Outlook for 2016

During its recent investor and analyst day, Illinois Tool Works reiterated its performance goals for 2017. Its management has set its targets as the fruition of a five-year enterprise strategy plan intended to increase margin and revenue growth. Let's look at the analyst day presentation in the context of making a decision to buy the stock or not.

The company's enterprise plan means the stock offers self-help growth opportunities -- not a bad quality in a sluggish economy -- but ultimately its fortunes are still tied to the industrial economy. The question is whether the former is enough to offset any difficulties with the latter in 2016.

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Illinois Tool Works Equity Analysis

Investors buy stocks for many different reasons, and differing investment philosophies can easily lead to radically diverging conclusions on the same stock. A good example is Illinois Tool Works. The stock is interesting because it offers different things to growth and value investors, and depending on your perspective, it might fit your portfolio. Let's take a closer look.



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Illinois Tool Works Earnings Analysis

Another quarter brings another set of earnings from Illinois Tool Works in which the underlying improvements due to its five-year enterprise strategy plan are hidden by deteriorating end markets. In short, management reduced earnings guidance to account for a weaker economy, but its ongoing initiatives continue to make progress -- possibly setting the company up for strong growth given a pickup in the industrial economy. Let's take a closer look at the earnings.


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Time to Buy Illinois Tool Works?

Diversified industrial giant Illinois Tool Works stock has notably underperformed the S&P 500 this year -- however, it's not the only one. As the chart below shows, many industrial stalwarts have gotten caught in the headwinds building up against the sector. The stronger U.S. dollar, a soft capital spending environment, declining energy capital expenditures, and weaker growth in China and other emerging markets have made conditions difficult. That said, the company's execution of its five-year enterprise strategy remains on track, and much of its operational effectiveness looks set to improve. Does this make the current weakness a buying opportunity for you?


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3M Company Earnings Analysis

It's no secret that 3M Co.   is one of the best run companies in North America, and it's also no secret that the company's stock valuation of 20 times current earnings is hardly cheap. The company is best understood as a play on global industrial growth, and in this sense it's useful to compare it to other industrial stalwarts, such as Illinois Tool Works    and Emerson Electric. With this in mind, investors need to ask themselves what 3M needs to do to make it a good value.

3M's relative valueThe graph below offers a look at its valuation compared to Emerson Electric and Illinois Tool Works using enterprise value (market cap plus debt), or EV, over free cash flow:

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3 Reasons to Like Illinois Tool Works

uying engineering component manufacturer Illinois Tool Works  is never going to be the raciest of investment propositions; however, the company is quietly going about the business of improving its prospects in 2014, and it deserves a close look. The company's recent results produced three key takeaways for investors to like about the stock, and provided plenty of information that would be useful investors in peers like Danaher Corporation   and Rockwell Automation .

Illinois Tool Works' impressive first quarter
Overall operating income increased by 16% even though revenue was only up by 4%. A quick look at a breakdown of operating income reveals how Illinois Tool Works generated its earnings in the quarter.

The red bars in the chart represent the growth rate in the quarter, while the total bars (red plus blue bars) represent the total operating income.

 

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Illinois Tool Works Equity Research

Illinois Tool Works is always one of the most interesting industrial companies to follow because it has broad exposure to the industrial economy. In particular, Foolish investors in peers like Johnson Controls Inc.  and 3M Company should take note, while Fools invested in industrial supply companies like WESCO International Inc.  and Fastenal Company will surely have an interest, too.

How Illinois Tool Works makes money
A quick look at Illinois Tool Works' revenue by end market reveals how diverse its end-market customers are. Even within the automotive segment, it sells into a mix of original equipment manufacturers and aftermarket customers. It's a similar story within its construction (residential, commercial, and renovation) and its food (institutional, service, and retail) sales, too.

 

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