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Stock Analyst Update

Market Unfairly Punishing Illinois Tool Works

A cut in guidance has sent shares plunging, but we see no permanent deterioration in the fundamentals of the business.


Nothing in narrow-moat-rated  Illinois Tool Works’ (ITW) results alters our long-term view of the firm. The stock is down about 8% as of this writing on news that management is cutting its guidance. We are maintaining our fair value estimate of $147.

The overall firm’s revenue run rate, moreover, is relatively in line with our 2018 top-line estimates for the overall firm ($15.1 billion versus a $15.2 billion run rate). Furthermore, current overall margins are also relatively in line with our 2018 full-year estimates between 24% and 25% (currently 24.2% in the first half versus our expectation of 24.7%).

Management is adjusting GAAP EPS expectations downwards by $0.10 in the second half of the year versus prior guidance. The new range is $7.50 to $7.70 from $7.60 to $7.80, previously. That said, our 2018 GAAP EPS estimate is within the range of both the prior and updated guidance at $7.66. The reason for moderating second-half expectations is due to greater-than-anticipated currency headwinds. 

Furthermore, margins will ultimately be affected relative to prior expectations due to the timing of price/cost impacts. The largest impact is from the automotive segment, where due to cyclical factors, management claims it can take a little bit longer for ITW to realize price actions from new products to offset these dilutive impacts. We’re not concerned by either of these effects as we see no permanent deterioration in the fundamentals of the business.

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Joshua Aguilar does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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