2012: High Growth For Illinois Tool Works
Christopher is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Illinois Tool Works (NYSE: ITW) is one of the broadest reaching industrial conglomerates in the United States and owns over 800 businesses that provide a range of industrial equipment and service ranging from plastic components, polymers and fluids to food processing equipment such as refrigeration units, pollution control systems and ventilation systems to construction equipment and even office furnishings. In late July of 2011, its shares took a dip in response to the faltering confidence of investors in large conglomerates that many feel would operate better if split apart. Its stock is currently on a rebound heading into 2012 and its 2011 profits have exceeded those of its prior fiscal year in only three quarters. Will Illinois Tool Works be able to appease concerned investors in 2012 or will its shares take a turn for the worst?
At the heart of Illinois Tool Works’ stock drop in the middle of 2011 was a market response to the activism of Relational Investors LLC. Relational Investors LLC began buying up shares in an attempt to gain influence over the conglomerate due to its belief that Illinois Tool Works could be run much more efficiently. Relational Investors is responsible for the recent breakup of several other companies in recent history and its interest in Illinois Tool Works raised several red flags with speculators. In January of this year, however, Illinois Tool Works struck a deal with Relational Investors that resulted in the appointment of one of its founders onto Illinois Tool Works’ board under the stipulation that Relational Investors not acquire more than a 10% stake in the company.
With the takeover controversy behind it, Illinois Tool Works heads into 2012 with assets worth $18.3 billion and liabilities of $8.5 billion — only $3.5 billion of which is dedicated to long term debt. In its last three quarters it averaged profits of more than $533 million per quarter and is on pace to blow away its $1.5 billion profit in its latest full fiscal year. The upward trend in its profitability may allow it to grow amid the influence of naysayers who have shown increased scrutiny of large conglomerates in recent history.
Due to its diversity in the industrial sector, Illinois Tool Works must compete with some large players in each of the niches it operates in. Deere & Company (NYSE: DE) is one of its larger competitors in the industrial machinery market with a market cap of $35.7 billion. Deere posted a profit of $2.7 billion in 2011, up from a $1.8 billion profit in 2010. General Electric (NYSE: GE) also competes with Illinois Tool Works in the electrical equipment and appliance markets. General Electric has a market cap of over $204 billion and makes consistent profits in excess of $11 billion per year, but its own diversity into many different markets doesn’t make it a grave threat to Illinois Tool Works’ success.
Illinois Tool Works has numerous other competitors that include Caterpillar (NYSE: CAT) in the machinery market and Cooper Industries (NYSE: CBE), which produces electrical equipment. The diversity of Illinois Tool Works gives the company an economic moat that allows it to take on large competitors in every market it has a reach into and provides a hedge against poor sales in a single sector of its business. It is for this reason that I believe this stock is always going to be a buy as long as it remains consistent and profitable.
The recent history of Illinois Tool Works makes me believe that it is headed for a bullish run through 2012 despite all of the negative attitudes some investors take toward conglomerates. Last July, its stock slipped from $57 per share to $40 in only three months, but it began to make a slow building recovery to end the year. Heading into January, Illinois Tool Works crossed the $46 per share mark, which was significant in that it passed the 30 day, six month and one year moving averages of $47, $49 and $50, respectively and has grown from $50 per share to $56 in the three weeks to follow. I am expecting that we will see a slow and steady climb through the rest of 2012, making this the time to take a position in this growing stock.
Illinois Tool Works also provides a quarterly dividend that makes it attractive to income investors. Its latest dividend paid out at $0.36 per share and it has paid out $1.44 per share over the last four quarters for a yield of 2.6%. Its payout ratio is currently 0.34, leaving room for growth and showing the ability to maintain the dividend in the future. At a yield of 2.6%, however, the dividend is the icing on the cake and I believe the real benefit here is in the growth of its stock value going into this year.
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