Conglomerates Stocks

Illinois Tool Works Inc Valuation – August 2017 $ITW

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 10 Stocks for Using A Benjamin Graham Value Investing Strategy – March 2017.  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 stock analysis showing a specific look at how Illinois Tool Works Inc (ITW) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Illinois Tool Works Inc. is a manufacturer of industrial products and equipment. The Company operates through seven segments. The Automotive OEM segment produces components and fasteners for automotive-related applications. The Food Equipment segment offers commercial food equipment. The Test & Measurement and Electronics segment produces test and measurement, and electronic manufacturing and maintenance, repair and operations (MRO) solutions. The Welding segment produces welding equipment, consumables and accessories for industrial and commercial applications. The Polymers & Fluids segment produces adhesives, sealants, lubrication and cutting fluids, and fluids and polymers for auto aftermarket maintenance and appearance. The Construction Products segment supplies engineered fastening systems and solutions. The Specialty Products segment produces beverage packaging equipment and consumables, product coding and marking equipment and consumables, and appliance components and fasteners.

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Premium members can view a full ModernGraham valuation of the company and have access to download a PDF version of the valuation for easy reference. Recent valuations of the components of the Dow Jones Industrial Average are available for free members, including this one of Microsoft Corporation.  In addition, here is a post detailing what can be found within each individual company’s valuation.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of ITW – August 2017

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $47,616,520,187 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 2.32 Pass
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 124.78% Pass
6. Moderate PEmg Ratio PEmg < 20 23.09 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 10.08 Fail
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 2.32 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 1.97 Fail
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

EPSmg $5.99
MG Growth Estimate 6.27%
MG Value $126.13
Opinion Fairly Valued
MG Grade B
MG Value based on 3% Growth $86.89
MG Value based on 0% Growth $50.94
Market Implied Growth Rate 7.29%
Current Price $138.36
% of Intrinsic Value 109.69%

Illinois Tool Works Inc. is suitable for the Enterprising Investor but not the more conservative Defensive Investor.  The Defensive Investor is concerned with the  high PEmg and PB ratios. The Enterprising Investor is only concerned with the level of debt relative to the net current assets.  As a result, all Enterprising Investors following the ModernGraham approach should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be Fairly Valued after growing its EPSmg (normalized earnings) from $4.23 in 2013 to an estimated $5.99 for 2017.  This level of demonstrated earnings growth supports the market’s implied estimate of 7.29% annual earnings growth over the next 7-10 years.  As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value within a margin of safety relative to the price.

At the time of valuation, further research into Illinois Tool Works Inc. revealed the company was trading above its Graham Number of $42.93.  The company pays a dividend of $2.4 per share, for a yield of 1.7%  Its PEmg (price over earnings per share – ModernGraham) was 23.09, which was below the industry average of 26.48, which by some methods of valuation makes it one of the most undervalued stocks in its industry.  Finally, the company was trading above its Net Current Asset Value (NCAV) of $-13.18.

Illinois Tool Works Inc. performs fairly well in the ModernGraham grading system, scoring a B.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) -$13.18
Graham Number $42.93
PEmg 23.09
Current Ratio 2.32
PB Ratio 10.08
Current Dividend $2.40
Dividend Yield 1.73%
Number of Consecutive Years of Dividend Growth 20

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Useful Links:

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GuruFocus SEC Filings

Most Recent Balance Sheet Figures

Balance Sheet Information 6/1/2017
Total Current Assets $6,570,000,000
Total Current Liabilities $2,826,000,000
Long-Term Debt $7,360,000,000
Total Assets $15,922,000,000
Intangible Assets $6,041,000,000
Total Liabilities $11,151,000,000
Shares Outstanding (Diluted Average) 347,500,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $6.68
Dec2016 $5.70
Dec2015 $5.13
Dec2014 $7.28
Dec2013 $3.74
Dec2012 $6.06
Dec2011 $4.19
Dec2010 $2.99
Dec2009 $1.89
Dec2008 $2.91
Dec2007 $3.36
Dec2006 $3.01
Dec2005 $2.60
Dec2004 $2.20
Dec2003 $1.66
Dec2002 $1.16
Dec2001 $1.32
Dec2000 $1.58
Dec1999 $1.38
Dec1998 $1.33
Dec1997 $1.14

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $5.99
Dec2016 $5.63
Dec2015 $5.49
Dec2014 $5.39
Dec2013 $4.23
Dec2012 $4.18
Dec2011 $3.18
Dec2010 $2.73
Dec2009 $2.65
Dec2008 $2.96
Dec2007 $2.85
Dec2006 $2.44
Dec2005 $2.03
Dec2004 $1.69
Dec2003 $1.43
Dec2002 $1.32
Dec2001 $1.39

Recommended Reading:

Other ModernGraham posts about the company

Illinois Tool Works Inc Valuation – July 2016 $ITW
Dividend Growth Stocks for Intelligent Investors – June 2016
Dividend Growth Stocks for Intelligent Investors – February 2016
Illinois Tool Works Inc Valuation – January 2016 Update $ITW
Dividend Growth Stocks for the Intelligent Investor – November 2015

Other ModernGraham posts about related companies

E I du Pont de Nemours & Co Valuation – August 2016 $DD
3M Company Valuation – August 2016 $MMM
General Electric Co Valuation – July 2016 $GE
Illinois Tool Works Inc Valuation – July 2016 $ITW
Raven Industries Inc Valuation – July 2016 $RAVN
E.I. du Pont de Nemours Valuation – February 2016 $DD
Honeywell International Inc Valuation – February 2016 $HON
3M Company Valuation – February 2016 Update $MMM
Raven Industries Inc Valuation – January 2016 Update $RAVN
Illinois Tool Works Inc Valuation – January 2016 Update $ITW

Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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