Illinois Tool Works passes the initial requirements of both the Defensive Investor and the Enterprising Investor. The Defensive Investor’s only concern is the high PB ratio, while the Enterprising Investor is only concerned with the level of debt relative to the net current assets. As a result, all value investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.
When it comes to that valuation, it is critical to consider the company’s earnings history. In this case, ITW has grown its EPSmg (normalized earnings) from $2.73 in 2010 to $5.39 for 2014. This is a strong level of demonstrated growth, which is well above the market’s implied estimate for earnings growth of only 4.7% annually over the next 7-10 years. In fact, the historical growth is around 19.5% per year, so the market is expecting a very significant drop in earnings growth. The ModernGraham valuation model reduces the historical growth to a more conservative figure, assuming that some slowdown will occur, but still returns an estimate of intrinsic value falling above the current price, indicating the company is undervalued at the present time.
Be sure to check out previous ModernGraham valuations of Illinois Tool Works Inc. (ITW)Â for a greater perspective!
Disclaimer: The author did not hold a position in Illinois Tool Works Inc. (ITW)Â at the time of publication and had no intention of changing that position within the next 72 hours. Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.