Illinois Tool Works Sold Low to Go High

Josef Ray is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Strong demand for construction materials, welding equipment and restaurant supplies in North America contributed to Illinois Tool Works' (NYSE: ITW) higher-than-expected profit growth last quarter despite languid international markets. Financial analysts said the demand was further boosted when ITW marked down prices of its raw materials last month, leading to a significant increase in its sales throughout the United States. From $507 million in the same period of last year, earnings grew to $524 million or $1.12 per share, six cents higher than its initial projection at the outset of the quarter.

Illinois Tool Works' latest quarterly results did not only underscore its sustained growth but also drummed in the positive outlook boldly divulged by its management. For years, the listed firm has recorded an average of 10.2 percent growth in its annual earnings, exceeding projections and beating previous performances year after year.

Since the company focused on portfolio management this year, it has pursued several notable acquisitions and divestments. Earlier this quarter, Illinois Tool Works reported the completion of its divestment of a 51% stake in its Decorative Surfaces Division to an account managed by giant private equity investment firm Clayton, Dubilier & Rice (CD&R). Apart from allowing its stock to gain significant momentum in the market, the divestment is said to have allowed Illinois Tool Works to deal out free resources to the rest of its core businesses and be involved in the formation of Wilsonart International Holdings, LLC, in common with other related international businesses. Illinois Tool Works is expected to have a 49 percent stake in the new business and gain roughly $1.05 billion in cash, which it will subsequently use in the repurchase of common shares in Wilsonart.

Considering Illinois Tool Works’ inveterate share repurchases and dividend payments, plus its favorable raw material costs, it seems that the industrial products and equipment manufacturer continues to prime itself as the best investment option in the industrial end market. Its positive core growth for the past three quarters of 2012, as indicated by its registered 15.95 percent year-to-date growth as of the quarter, imprints its upper hand over three of its major competitors in the industry, General Electric, Manitowoc (NYSE: MTW) and Cooper Industries (NYSE: CBE).

In its third quarter results, Cooper Industries indicated negative core growth in its sales as a result of softening demands for its products in the utility end market. Manitowoc, whose growth is chiefly driven by large international projects, alternatively disclosed slower growth as more of its utility clients reportedly shelved implementation of big-ticket construction projects both in and out of the United States. While the sluggish growth of its rivals has been in plain sight for the past three quarters of the year, the healthy end market demand of Illinois Tool Works has been just as visible, even topping Zacks Consensus Estimate of $4.6 billion by the end of the third quarter.

For financial analysts, prospects remain bright for Illinois Tool Works. Making allowances for the high estimate revisions of the firm since the opening of fiscal year 2012, analysts believe the company will continue to perform just as agreeably in the quarters ahead. The impact of acquisitions since the beginning of the year, including that of Despatch Industries, Graco Inc. (NYSE: GGG) and Gema, Inc., has earned Illinois Tool Works multi-fold returns on its invested capital, swelling its already robust $17.8 billion worth of total assets by the end of 2011. Now that the firm employs the 80/20 operational tool in its business process, it is expected to concentrate on its most profitable products and customers and derive the preponderance of its sales from the segment. With its sustained presence in over 57 countries worldwide, plus its adoption of the powerful 80/20 guiding principle, Illinois Tool Works is projected to bolster its operating margin and grow by double-digits in the quarters ahead, cashing in on the weak demands for Cooper's, Manitowoc's and General Electric's products in the end market. 

JosefRayDagatan has no positions in the stocks mentioned above. The Motley Fool owns shares of General Electric Company. Motley Fool newsletter services recommend Illinois Tool Works. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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