Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. Â This isÂ best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another companyÂ or by reviewing theÂ 5 Highest Dividend Yields Among Undervalued Companies for the DefensiveÂ Investor.Â By using theÂ ModernGraham methodÂ one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. Â What follows is a specific look at how Illinois Tool Works (ITW)Â fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â 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 -Â PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 -Â 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 -Â 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 -Â PASS
- Earnings growth – EPSmg greater than 5 years ago -Â 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 WorksÂ is suitableÂ for the Enterprising Investor but not the Defensive Investor. Â The Defensive Investor has concerns with the company’s low current ratio, and high PEmg and PB ratios. Â The Enterprising Investor has no major issues as the company passed all of the investor type’s requirements. Â As a result, Enterprising InvestorsÂ 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). Â From a valuation perspective, the company appears to be fairlyÂ valued after growing its EPSmg (normalized earnings) from $2.77 in 2010 to an estimated $4.25 for 2014. Â This level of demonstrated growth supportsÂ 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 toÂ the current price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. Â What do you think? Â What value would you put on Illinois Tool Works (ITW)? Â Where do you see the company going in the future? Â Is there a company you like better? Â Leave aÂ comment on ourÂ Facebook pageÂ or mentionÂ @ModernGrahamÂ on Twitter to discuss.
Disclaimer: Â The author held a long position in Dover Corp (DOV) but did not hold a positionÂ 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. Â Logo taken from wikipedia; this article is not affiliated with the company in any manner.