Shares of Illinois Tool Works
Illinois Tool Works has a solid track record of growth, employing a core philosophy that 20% of its customers generate 80% of its sales and earnings. By focusing on these key clients, it has been able to grow both sales and earnings at approximately 12% over the past decade, which is split between organic, or internal, growth and acquisitions. Management is always on the acquisition trail and just today announced it was acquiring CFC International
Management offered recent guidance last Thursday and detailed that sales rose 8% for the fiscal quarter ended in May because of strong performance in the U.S. It also reiterated projections for second-quarter earnings in the range of $0.76-$0.79 and full-year forecast of $2.94-$3.04 per share, which would represent about 16% year-over-year growth. Plus, it guided internal, or organic, sales growth of 4.2%-6.2% for the quarter and 4.6%-6% for the year. Investors can also bank on 4%-6% from acquisitions, as management has proven adept at finding literally hundreds of buying opportunities as the company sells an estimated 5,000 products and operates via more than 700 different business segments.
The company has proven a consistent generator of operating cash flow in excess of net income, although, because of a large number of acquisitions and capital expenditure, free cash flow tends to be more difficult to pinpoint. A more serious drawback is that ITW operates in a number of cyclical industries, including construction, automotive, and general industrial sectors. At this point in the economic cycle, the shares are perhaps a bit pricy, as they currently trade at a forward P/E multiple of over 15, leaving little room for downside should earnings fall with a weak economy. And although the growth track record is consistent, I'd demand a larger margin of safety for a company with so many moving parts, including the number of business divisions and acquisitions that must continually be digested and folded into the company.
Overall, cyclical companies are hard to recommend as long-term buy-and-hold investments. In a previous posting, I highlighted why this is so. There are occasionally compelling opportunities to make a timely purchase; one could argue that a currently beat-down Tyco