Why Illinois Tool Works Inc. Stock Is Poised for Solid Growth Potential (ITW)

Organic growth, improving margins and a steady dividend power ITW ahead for investors

We issued an updated research report on industrial tool maker Illinois Tool Works Inc. (ITW) on Jan 19, 2017. The company, with a $43.3 billion market capitalization, specializes in manufacturing highly engineered products and specialty systems.

We currently find the stock suitable for investment, considering both its near past performances as well as its future prospects. The company posted better-than-expected results, with an average positive earnings surprise of 2.25% in the last four quarters.

Its shares yielded 51.67% return, outperforming the return of 40.87% recorded by the Zacks categorized Machinery-General Industrial industry in the last one year.

In addition, we believe that Illinois Tool Works Inc. has solid growth potential driven by its organic and inorganic growth tactics, its long-term Enterprise Strategy and sound capital allocation schemes. We predict its earnings to grow 7.5% in the next five years, while anticipate sales and earnings to grow 2.99% and 9.23%, respectively in 2017. Below we discuss some of the long- and short-term targets set by the company:

By the end of 2018 and beyond, Illinois Tool Works targets organic revenue growth to be 200 basis points (bps) above the market, an approximate operating margin of 25% (previous expectation was 23%), and return on invested capital of above 20%. Beyond 2018, shareholders’ returns are expected within 12−14% (including operating income growth of 9−10%, 1−2% earnings accretion from share repurchases and 2% dividend yield), while organic revenue growth rate is projected to be roughly 5%.

For 2017, Illinois Tool Works anticipates its earnings to come in within $6.00−$6.20 per share range, representing 9% year-over-year growth at mid point. Organic revenue growth is expected to be 1.5−3.5%. Total revenue will likely be $13.8−$14.1 billion.

Operating margin is expected to exceed 23.5%, driven by 100 bps contribution from the company’s enterprise initiatives. Full year free cash flow is anticipated to be 100% of net income (or approximately above $2 billion). Share repurchase will likely be roughly $1 billion.

Illinois Tool Works currently carries a Zacks Rank #2 (Buy). Over the last 60 days, the Zacks Consensus Estimate for the company increased 0.2% to $6.14 per share for 2017.

Other stocks worth considering in the machinery industry include Altra Industrial Motion Corp (AIMC), RBC Bearings Incorporated (ROLL) and Sun Hydraulics Corporation (SNHY).

All these stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Altra Industrial Motion Corporation reported better-than-expected results in the last four quarters, with an average positive earnings surprise of 8.06%. Also, earnings expectations for 2017 improved over the past 60 days.

RBC Bearings Incorporated’s earnings estimates for fiscal 2018 have been revised upward over the last 60 days. Also, the company has an average positive earnings surprise of 1.60%.

Sun Hydraulics Corporation has witnessed positive revisions in earnings estimates for 2017, over the past 60 days.

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Illinois Tool Works Inc. (ITW): Free Stock Analysis Report

Sun Hydraulics Corp. (SNHY): Free Stock Analysis Report

Altra Industrial Motion Corp. (AIMC): Free Stock Analysis Report

RBC Bearings Inc. (ROLL): Free Stock Analysis Report

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