Illinois Tool Works - The Best May Lay Ahead

In many respects, Illinois Tool Works (NYSE:ITW) is both remarkable and bizarre. Illinois Tool Works is a serial acquirer, but instead of wasting shareholder money on executive vanity products, the company has a record of doing deals that seem to build value. What's more, the company operates in a lot of businesses that are widely considered to be commoditized, and yet the company maintains high market share, high margins and high returns on capital. In other words, Illinois Tool Works seems to defy a lot of the so-called rules about how big companies operate. 

The Quarter that Was
Like many other industrial conglomerates ranging from Dover (NYSE:DOV) to Danaher (NYSE:DHR), to United Technologies (NYSE:UTX), Illinois Tool Works has been enjoying a solid rebound in its overall business. For the company's fourth quarter, sales rose 11% as reported, with organic sales growth of better than 9%. Top-line growth was led by large segments like packaging and power systems/electronics, with organic growth in excess of 12% and 21%.

Although revenue growth is ticking along nicely, the profitability of the business is not doing quite as well by comparison. The company's operating margin did improve from the year-ago period (up to 13.9% from 12.7%), but the improvement was less than expected and the company did miss earnings (even with a lower-than-expected tax rate kicking in a few extra cents per share).

Nothing really stands out as an obvious source of disappointment, though, and the quarter is hardly a disaster. That said, the company did see a decline in gross margin and the ongoing price pressure in metals, energy, and other basic commodity inputs is not going to help matters.


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