About Illinois Tool Works
I don’t mean to brag, but I have the distinct pleasure of being an operator of a Hobart FT900-14 Flight Type Conveyor and I am so serious when I say that it runs like an absolute dream.
For those who aren’t familiar with this wondrous machine, first of all, you gotta get a grip and get a Hobart involved in your life somehow, second of all, it is pretty much an industrial dishwasher that I make nearly daily contact with at my job at the university I attend.
Yes, I am a dishwasher on the side.
Please hold your applause.
Anyways, the Hobart dishwasher is so easy to use, as the green button makes the machine go, red button makes it stop, the temperatures are usually well regulated and maintained so as to ensure nearly spotless dishes come out of the other end and subsequently distributed to those that dine in our local dining domain.
In all seriousness, the machine really does run fantastically well.
Additionally, Hobart just happens to be one of Glenview, Illinois-headquartered Illinois Tool Works’ (ITW) various business segments.
That being said, I’m not just around a Hobart product all day, but also numerous Traulsen commercial kitchen refrigeration machines, which just so happens to also be a part of Illinois Tool Works.
If you would’ve assumed at this juncture that ITW is just an industrial company with a sole focus in the commercial kitchen space, we wouldn’t have blamed you but you still would’ve been incorrect.
You see, Illinois Tool Works also operates an automobile components business by the name of Deltar (and a few others), a construction products brand that is home to names such as Alpine, GRK Fasteners, Paslode, Ramset, Red Head Concrete Anchoring Systems, Tapcon, Elematic, NKT Fasteners, Cullen as well as having a few subsidiaries in the product packaging and adhesive and lubricants sectors and a welding and testing and measuring branch within its corporate umbrella.
Illinois Tool Works has a lot of brand power, to say the least, and given the particular sector in which it operates, we deem many (if not most) of these industries to be recession resistant to a large degree, which is a good start from our vantage point.
We briefly nerded out over an industrial dishwashing machine, we gave a brief overview of ITW and its respective business segments and thus it seems like a great time to gain some clarity regarding this company and its core financials and other pertinent ratios and metrics.
Let’s do this thing.
ITW’s stock financials
With a current share price of $241.98, a market capitalization of $73.54 billion, a price-to-earnings (P/E) ratio of 24.51 and an annually distributed dividend of $5.24 to its shareholder base, Illinois Tool Works’ share price (NYSE: ITW) appears to be a bit ahead of its actual, intrinsic worth given that its present price-to-earnings ratio is trading a few points above that of the standard fair value benchmark of 20, however, distributing a rather sizable annual dividend is hardly a bad thing (that is, if the company can afford to issue said dividend) and if there is some growth behind this company, ITW just might be worth paying a slight premium for, but we shall see.
With respect to the overall condition of the company’s balance sheet, Illinois Tool Works’ executives are tasked with tending to and managing around $15.4 billion in terms of total assets as well as approximately $12.3 billion in terms of total liabilities (half of which is apparently categorized as “total long term debt”, which is a good thing, all things considered), which to us is a rather elevated amount of total liabilities compared to total assets, however, being a leader in a handful of industrial sectors usually means handling a lot of equipment and the fluctuating costs associated with said equipment, which can add up quickly for a company with the size, scale and reach such as Illinois Tool Works.
Nevertheless, we enjoy the fact that this company’s total assets are greater than its total liabilities overall.
As it relates to the company’s income statement, particularly its recent total annual revenues, ITW’s have been just about as consistent as initially expected, on average floating around the $14 billion area code since 2018, experiencing a drop between 2019 and 2020, however, of around $2 billion which was likely due to many of its customer’s venues being closed, for instance, commercial kitchens and public dining complexes.
Obviously, this $2 billion hit to the downside isn’t ideal but come on, we figured this company, like many others, would’ve taken a bit of a hit during the initial public onset of COVID-19, and we are certainly happy to find that in the years that followed its total annual revenues jumped back up to normal, previous levels.
Regarding Illinois Tool Works’ net income and total cash from operations since 2018 (according to the cash flow statement), both of these figures over the years have been solid as a rock, remaining both positive and consistent, implying that ITW’s business segments are quite cash flow generative, which is certainly more of a positive than a negative in any context.
ITW’s stock fundamentals
We were apparently onto something regarding ITW’s ability to generate cash and subsequently, a strong overall trailing twelve month (TTM) net profit margin, as it is specifically reported (displayed on TD Ameritrade’s platform) as a whopping 19.27% to the industry’s listed respective average of 3.44%.
This is just about as material and substantial as it gets, as it seems as though Illinois Tool Works operates in some very profitable lines of business and sectors and has struck a fantastic balance in operating in such sectors in a capital efficient fashion.
Speaking of capital efficiency, ITW’s listed TTM returns on both assets and investment(s) stand well above those of the industry’s listed averages, which is surely yet another indication that this company has been and still is intent on deploying its capital strategically and doing well by its shareholders in operating the businesses it has and will continue to operate, or perhaps acquire in the future.
Some considerations for ITW
That being said, while Illinois Tool Works already has a phenomenal foundation and a great consistent, cash flow generative future ahead of itself, if one doesn’t continue innovating or meaningfully expanding its business(es), things could go south sooner rather than later.
This is exactly why we think it is worth ITW’s time to consider (that is, if it hasn’t already) acquiring some more essential businesses that companies and other entities such as universities and other public complexes use every single day, perhaps, if they find the commercial kitchen space particularly profitable moving forward, leading commercial food waste company, Kansas City, Missouri-based Salvajor, as it practically dominates the food waste processing and disposal systems space.
Yes, there is one of Salvajor’s disposal machines where I work.
You find inspiration in weird places sometimes, alright?
Nevertheless, this is an essential service that commercial kitchens need on a daily basis and it could just be yet another way in which ITW bulks up its revenues, generates more cash flows and deepens its claws into the commercial kitchen space.
Additionally, another company ITW might want to consider looking into is kitchen (and really, general facility) ventilation specialist, Greenheck.
Obviously, like Salvajor, Greenheck serves quite an important purpose and role in one’s facility, whether it is a local restaurant, a school, a gym or a commercial kitchen in preserving the safety of occupants within any of the facilities it serves.
From air movement and distribution, general ventilation, humidity control, filtration and others, Greenheck seems like the kind of recession resistant business ITW would be interested in owning.
Should you buy ITW stock?
This is one of our favorite corporate conglomerates we’ve analyzed so far.
ITW has a host of brands and businesses within a variety of seemingly profitable sectors that are recession resistant by nature, for the most part.
Its total annual revenues over the last handful of years have been consistent as all get out, its TTM net profit margin and associated returns on assets and investments are plenty strong when compared to the averages of its competitors, not to mention its relatively strong balance sheet structure.
All of this being the case, we still aren’t ready nor willing to pay a premium for a company that historically generates consistent and still comforting figures, which is a good thing, just not worth paying more than fair value for at the moment, especially in this current stock market and market environment in general.
Considering all of this information, we think it is best to give Illinois Tool Works’ stock (NYSE: ITW) a “hold” rating right now.
DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.