3 Reasons ITW is Risky and 1 Stock to Buy Instead

Illinois Tool Works has been treading water for the past six months, recording a small return of 0.8% while holding steady at $249.49. The stock also fell short of the S&P 500’s 10.3% gain during that period.

Is there a buying opportunity in Illinois Tool Works, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.

Why Is Illinois Tool Works Not Exciting?

We’re sitting this one out for now. Here are three reasons we avoid ITW, plus one stock we’d rather own.

1. Core Business Falling Behind as Demand Plateaus

In addition to reported revenue, organic revenue is a useful data point for analyzing General Industrial Machinery companies. This metric gives visibility into Illinois Tool Works’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.

Over the last two years, Illinois Tool Works failed to grow its organic revenue. This performance was underwhelming and implies it may need to improve its products, pricing, or go-to-market strategy. It also suggests Illinois Tool Works might have to lean into acquisitions to accelerate growth, which isn’t ideal because M&A can be expensive and risky (integrations often disrupt focus).

2. Projected Revenue Growth Is Slim

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.

Over the next 12 months, sell-side analysts expect Illinois Tool Works’s revenue to rise by 3.1%. While this projection suggests its newer products and services will spur better top-line performance, it is still below the sector average.

3. Recent EPS Growth Below Our Standards

While long-term earnings trends give us the big picture, we also track EPS over a shorter period because it can provide insight into an emerging theme or development for the business.

Illinois Tool Works’s EPS grew at a weak 3.1% compounded annual growth rate over the last two years. On the bright side, this performance was higher than its flat revenue and tells us management responded to softer demand by adapting its cost structure.

Final Judgment

Illinois Tool Works isn’t a terrible business, but it doesn’t pass our quality test. With its shares trailing the market in recent months, the stock trades at 22× forward P/E (or $249.49 per share). This valuation multiple is fair, but we don’t have much faith in the company. We’re fairly confident there are better investments elsewhere. We’d recommend looking at one of our top digital advertising picks.

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