Recession fears have shaken Wall Street in 2022. Many companies are cutting or pulling their guidance, laying off employees, and generally bracing for the macroeconomic storm that might come. But industrial conglomerate Illinois Tool Works (ITW -1.11%) isn't one of them. The company's firing on all cylinders, as evidenced by its strong third-quarter earnings. The company's 59 consecutive annual dividend increases and Dividend King status show that its recent performance is no fluke.
Let's take a closer look at why the company is doing so well and why investors should consider riding this winner's strong performance into what is otherwise an uncertain 2023.
Illinois Tool Works offers a great combination of diversification and growth
Illinois Tool Works has its hands in various global industries. For starters, the company operates seven unique business segments. They are:
- Automotive OEM
- Food Equipment
- Test & Measurement/Electronics
- Welding
- Polymer & Fluids
- Construction Products
- Specialty Products
That's a wide range of end markets, and the diversity it creates goes a long way in helping the company grow. If a particular end market is struggling, another can pick up the slack. Additionally, the company sells worldwide, which includes domestic markets like North America and emerging markets like the Middle East and China, which is often a tough nut to crack because of the political climate.
Illinois Tool Works has a long history of growth, but you can see below that the journey can be bumpy sometimes. That's because the company can be sensitive to the economy. Its diverse business helps it endure the down times, but it might not escape major events like COVID-19, when significant parts of the global economy effectively came to a temporary halt.
ITW Revenue (TTM) data by YCharts
Fortunately, management has a long history of navigating the rough seas -- you don't consistently raise a dividend through multiple economic cycles by not knowing what you're doing. A healthy balance sheet helps; Illinois Tool Works is levered to a 1.9x debt-to-EBITDA ratio; I consider anything under 2.5x to be strong.
Illinois Tool Works is ending the year on a high note
A recession next year could negatively impact Illinois Tool Works, but it's ending 2022 with a full head of steam. The company's third-quarter earnings included 16% year-over-year organic revenue growth, and GAAP earnings-per-share (EPS) grew by the same amount. Additionally, the company is expanding its operating margin, which is an excellent sign at a time when inflation is pressuring companies across the economy.
Image source: Illinois Tool Works.
Management raised its full-year guidance for 2022 too; organic revenue growth was initially expected at 7% to 10%, but increased to 11% to 12%. Meanwhile, EPS was boosted from $9.00 to $9.40 to between $9.45 and $9.55. Again, a recession could hit the business, but management raising its top- and bottom-line expectations shows confidence in the business.
Reasonable valuation leaves room for long-term investors
A quality company raising the bar is the type of stock you might want to look for during a bear market. But it's also true that Illinois Tool Works isn't precisely a no-name stock, which shows in the valuation. The stock trades at a forward price-to-earnings ratio (P/E) of 24, above its decade-long median of 21.
ITW PE Ratio (Forward) data by YCharts
It's hard to call the stock a screaming bargain here; the company's third solid quarter caused a run on shares. However, long-term investors can wait for the business to grow into its valuation. Analysts believe EPS will increase by 7% annually over the next three to five years. In addition, the stock's dividend yields 2.3% at today's price. Rallies often don't last in a bear market, so patient investors could also get a better deal if the stock's recent momentum fades in the weeks and months ahead. Ultimately, Illinois Tool Works is an excellent business performing at a high level, making it a great potential addition to your portfolio for 2023 and beyond.
