Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Highest Dividend Yields Among Undervalued Companies for the Defensive Investor. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how Illinois Tool Works (ITW) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Illinois Tool Works Inc. is a multinational manufacturer of a diversified range of industrial products and equipment with operations in 58 countries. The Company operates in six segments: Transportation, Power Systems & Electronics, Food Equipment, Construction Products, Polymers & Fluids, and All Other. In July 2013, Illinois Tool Works Inc acquired Gold Pattern Holdings. In May 2014, the Company sold Industrial Packaging segment to The Carlyle Group.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
- Earnings Stability – positive earnings per share for at least 10 straight years – PASS
- Dividend Record – has paid a dividend for at least 10 straight years – PASS
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
- Moderate PEmg ratio – PEmg is less than 20 – FAIL
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
|MG Opinion||Fairly Valued|
|Value Based on 3% Growth||$61.64|
|Value Based on 0% Growth||$36.14|
|Market Implied Growth Rate||6.20%|
|Net Current Asset Value (NCAV)||-$3.80|
Balance Sheet – 3/31/2014
Earnings Per Share
Earnings Per Share – ModernGraham
Illinois Tool Works is suitable for the Enterprising Investor but not the Defensive Investor. The Defensive Investor has concerns with the company’s low current ratio, and high PEmg and PB ratios. The Enterprising Investor has no major issues as the company passed all of the investor type’s requirements. As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and comparing it to other opportunities through a review of ModernGraham’s valuation of Dover Corp (DOV) and ModernGraham’s valuation of 3M Corp (MMM). From a valuation perspective, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $2.77 in 2010 to an estimated $4.25 for 2014. This level of demonstrated growth supports the market’s implied estimate of 6.20% earnings growth and leads the ModernGraham valuation model, which is based on Benjamin Graham’s formula, to return an estimate of intrinsic value that is within a margin of safety relative to the current price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. What do you think? What value would you put on Illinois Tool Works (ITW)? Where do you see the company going in the future? Is there a company you like better? Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
Disclaimer: The author held a long position in Dover Corp (DOV) but did not hold a position in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours. Logo taken from wikipedia; this article is not affiliated with the company in any manner.