Illinois Tool Still Working

So, how would you like to have about one-fifth of your revenue tied to cyclical industries like automobiles and new housing? That's the case for Illinois Tool Works (NYSE:ITW), but it seems to me that a lot of people worry more about that 20% than the other 80%.

The quality of this industrial conglomerate's fourth-quarter results depends largely on what you look at in its earnings. Reported revenue was up 8%, and organic revenue was up less than 4%. Operating income climbed 11%, and net income rose 12% (though earnings per share increased 17%).

Maybe that doesn't sound too special to you, but check out some other numbers. Free cash flow was up about 37% for the quarter and 24% for the full year. Return on invested capital was up to about 20% for the fourth quarter -- roughly double the company's estimated cost of capital. Those are the numbers that speak to a value investor's heart.

While other conglomerates like Danaher (NYSE:DHR) and Motley Fool Inside Value recommendation 3M (NYSE:MMM) are posting better organic growth, that's not the final word on the matter. Management's guidance would suggest that Illinois Tool Works has some big expectations for acquisitions during the coming year. And given this company's past history of integrating new companies and generating good returns from them (check out that ROIC again), investors can look forward to the new arrivals.

That said, it's not the exposure to Ford (NYSE:F) and General Motors (NYSE:GM) that has me concerned, nor that the midpoint of the company's guidance fell below the average estimate -- I couldn't care less about that, actually. I am concerned that this seemed to be a fairly popular stock among analysts; I don't often find great value in those situations.

Sure enough, when I run my own cash flow numbers, I come up thinking that Illinois Tool Works' price is exactly between my fair value estimate and my margin of safety "buy" price. Though the stock isn't as popular as it could be, it's too popular for me to want to buy the shares today. All the same, with very strong historical cash flow and ROIC performance, this one stays on the watch list in the hopes of a temporary stock price swoon.

Tinker around with this related Foolishness:

• 3M Needs to Get MMMoving
• Danaher Does It All
• Tooling Around Illinois Tool Works

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Fool contributor Stephen Simpson owns shares of 3M but has no financial interest in any other stocks mentioned (that means he's neither long nor short the shares). The Motley Fool has an ironclad disclosure policy.