Stock Watch
Illinois Tool Works: The Nation's Toolbox
As the economy gathers momentum, this diverse manufacturing company should build sturdy profits.
September 19, 2003
The we-make-anything workshop company isn't a relic. Illinois Tool Works (ITW) is a collection of 600 businesses involved in everything from packaging to auto parts, commercial construction equipment, food-service machinery and more -- even the plastic rings that hold six-packs of soda. It's wrapped up into one low-risk, steady stock that's generated a return of 16% per year compounded over the past decade.
ITW's sales growth slowed in 2003 because of weakness in its automotive units and the divisions that supply equipment to hotels and restaurants. And the stock had slightly lagged Standard & Poor's 500-stock index over the past year until a small rally in August. But as the economy gathers momentum, ITW's order books should fill out.
A bigger question, says analyst Jeff Germanotta of William Blair & Co., an investment-banking firm, is when ITW can get back on the acquisition trail. ITW, which depends on buyouts for much of its growth, purchased significantly fewer businesses in 2002 and 2003 than it has in the past.
All in all, though, if you're an optimist about the economy, ITW is a sound choice. The company has a lot of cash for fresh acquisitions, and its profit margins are well above those of similar industrial companies. Because of these attributes, the stock has traditionally commanded an above-average P/E ratio relative to the overall market. Today you can buy it at 22 times the 2003 consensus earnings forecast of $3.22 per share. Dirt-cheap it isn't, but it's a fair price for this company.
--Jeffrey R. Kosnett