Illinois Tool Works Earnings: 3 Reasons to Like This Company

Illinois Tool Works delivered a solid set of results and promised more in terms of margin expansion. Its management also gave some useful guidance for investors in Danaher and Rockwell Automation to consider.

Apr 29, 2014 at 10:00AM

Buying engineering component manufacturer Illinois Tool Works (NYSE:ITW) 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 (NYSE:DHR) and Rockwell Automation (NYSE:ROK)

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.

Source: Illinois Tool Works Presentations

Clearly, Automotive, Food Equipment and Construction products provided the stand out performance in the quarter. However, Fools shouldn't get too excited by the automotive sector. It's been strong for a while now, but management forecasts that auto build rates will moderate to 1%-2% growth in the second quarter. Indeed, Rockwell Automation made a similar argument in its recent quarterly results. It doesn't mean that the auto sector will be weak, rather that growth will moderate.

Three reasons to like Illinois Tool Works after the results
The first reason is that, once again, its guidance looks a little bit conservative. Several industrial companies have come out recently and reported that industrial conditions are strengthening. For example, Danaher seems to have turned the corner with its industrial technologies segment and the industrial supply companies have been making more bullish noises recently. Indeed, Illinois Tool Works raised its full-year EPS guidance by $0.15 to $4.45-$4.65, putting the stock on a forward P/E of 18.8 times the mid-point of guidance.

However, the hike in guidance was attributed to being half due to increased share repurchases -- so it's not just about improved operating performance. Moreover, management did raise its full-year revenue forecast to 3%-4% from 2%-3% previously, but it didn't adjust its organic growth rate forecast of 2%-3%. This is somewhat puzzling, because its organic growth rate over the last two quarters has been 2.8% and 3.3% respectively. It's forecast implies a moderation in growth, but is Illinois Tool Works being too conservative?

The second reason is down to its ability to leverage revenue growth into profit growth thorough margin expansion. The company's EPS guidance implies an increase of 25% in earnings, but revenue is only forecast to grow by 3%-4%. The principle reason for this is the way the company is expanding margins. For example, five of its seven segments saw a increase in margin in the quarter.

Source: Illinois Tool Works presentations

Moreover, management reaffirmed its belief that all its segments would see margin expansion in 2014, and de-dacto upgraded its guidance to operating income margins of "mid 19s" from 19% previously.

Thirdly, Foolish investors can expect some improvement in certain segments of its operations. For example, its most cyclical segments are welding and the test & measurement and electronics segments (note how they saw a reduction in margin in the quarter), and they are likely to improve provided the industrial capital spending environment improves. Indeed, Danaher also reported weak conditions in its test & measurement segment.

Of course, there is no guarantee that the highly cyclical segments will turn for Illinois Tool Works -- in particular heavy equipment (mining, defense, shipping) spending looks challenging for its welding operations -- but the industrial supply companies are indicating that conditions are turning. If so, then margins can turn around for these two segments.

The bottom line
Illinois Tool Works produced a pretty solid set of results for its first quarter, and they confirmed what companies like Danaher and Rockwell Automation are saying about certain sectors of the economy.

On a positive note, its guidance still looks to be a bit conservative. However, the stock trades on a forward P/E ratio of 18.8 times earnings, and it probably needs upwards earnings revisions in order to move significantly higher from here.

You don't want to miss this
The Economist compares this disruptive invention to the steam engine and the printing press. Business Insider says it's "the next trillion dollar industry." And everyone from BMW, to Nike, to the U.S. Air Force is already using it every day. Watch The Motley Fool's shocking video presentation today to discover the garage gadget that's putting an end to the Made In China era... and learn the investing strategy we've used to double our money on these 3 stocks. Click here to watch now!

Lee Samaha owns shares of Danaher. The Motley Fool recommends Illinois Tool Works. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers