Global multi-industrial company Illinois Tool Works Inc. (ITW) in Mahwah, N.J., is known for manufacturing fasteners and components, consumable systems, and specialty products and equipment. ITW’s shares have declined 14.2% in price so far this year and 3.1% over the past month as its automotive segment continues to struggle with component supply shortages. In addition, rapidly rising input costs could hurt the manufacturer’s operating margins.

Its 2.29% four-year average dividend yield is 41.3% higher than the industry average. But the company’s 3.04% dividend per share growth rate for the current fiscal year is 47% lower than the 5.7% industry average. 

And although ITW achieved organic growth of 12% across six of its seven segments, the industrial company’s heavy debt load could be concerning. 

Here is what could influence ITW’s performance in the upcoming months:

Business Headwinds

Because global supply chain disruptions show no signs of abating, component shipment delays and rising prices for a vast array of goods continue to pose a daunting challenge for the leading industrial manufacturer. Significant upward pricing pressure on raw materials such as steel, resins, and chemicals could adversely affect ITW’s profitability and operating margin. Furthermore, as inflationary pressure worsens, the resulting price increases could negatively impact its business operations.

Mixed Dividend Story

ITW has declared a $1.22 per share dividend payment for the first quarter of 2022, payable on April 14, 2022. Its current quarterly dividend totals $4.88 annually, translating into a dividend yield of 2.30%. Also, its dividend payout has grown at a 9.9% CAGR over the past three years.  However, the 2.2% CAGR of its expected dividend per share growth for the next two years is 32.5% lower than the 3.2% industry average.

Unstable Financials

ITW’s total revenue rose 6% year-over-year to $3.7 billion in the fourth quarter ended December 31, 2021. However, its operating income stood at $834 million, down 5.5% from the prior-year quarter. The company’s EPS came in at $1.93, compared to $2.02 in the fourth quarter of 2020. Also, its net income came in at $609 million, representing a decline of 5.1% year-over-year. ITW’s free cash flow came in at $695 million over this period, compared to $705 million in the prior-year quarter.

Uncertain Growth Potential

The consensus revenue estimate of $3.95 billion for the next quarter ending June 2022 represents a 10.7% increase year-over-year. Also, the company’s revenue is expected to increase 9.2% from the prior-year quarter to $15.79 billion in the current year. But analysts expect ITW’s EPS to decline 1.4% year-over-year to $2.08 in the current quarter. Also, its EPS is estimated to decline 7.8% next quarter.

POWR Ratings Reflect Uncertain Prospects

ITW has an overall C rating, which translates to Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight distinct categories. ITW has a C grade for Momentum. The stock’s price return over the past month is in sync with the grade.

The company has a Growth grade of D, which is consistent with its uncertain growth prospects. Also, it has a Value grade of C. The stock’s forward EV/Sales ratio of 4.60, which is 159.1% higher than the industry average of 1.78x, is consistent with the grade.

In addition to the grades I have highlighted, one can check out additional ITW ratings for Quality, Stability, and Sentiment here. ITW is ranked #48 of 77 stocks in the B-rated Industrial – Machinery industry.

Bottom Line

Robust organic growth across six business segments in the last reported quarter has led to an improvement in ITW’s total revenue. However, as its Automotive OEM segment continues to be affected by limitations on auto production due to component supply issues, the company’s prospects could be limited. So, we think investors should wait for some improvement in its prospects before investing in the stock.

How Does Illinois Tool Works Stack Up Against its Peers?

While ITW has an overall C (Neutral) rating in our proprietary rating system, one might want to check out its industry peer Crane Co. (CR), ABB Ltd. (ABB), and Tennant Company (TNC) with an A (Strong Buy) rating.

ITW shares were unchanged in premarket trading Monday. Year-to-date, ITW has declined -14.20%, versus a -4.39% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More...

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