Reputation, Strategic Differentiation Supporting Illinois Tool Works

I’m not a fan of investment buzzwords (for instance, I think “dividend king” is moronic), but words like “cyclical” and “defensive” do at least give investors a simple shorthand for thinking about companies.

But then, it’s never really that simple. Take the case of Illinois Tool Works (ITW). It’s both defensive (with incredible margins) and cyclical, and that cyclicality is going to lead to some eye-popping revenue contraction in the coming quarters as the company absorbs the brunt of downturns in markets like autos, food equipment, welding, and non-residential construction.

Likewise, ITW isn’t afraid to break from the pack and manage its business in a decidedly non-defensive way – instead of worrying about minimizing decremental margins for a few quarters, ITW is going to pass on significant structural changes and is instead going to focus on taking share from smaller competitors whose scale, liquidity, or other operational attributes are forcing them to play defense.

I frankly love this move. I wish I loved the valuation as much. That’s a familiar complaint with me and this stock (and with many others who follow ITW), but it’s still relevant. Even if I assume ITW’s strategy works and they can gain share sufficient to allow them to grow the top line at rates similar to high-quality peers like Dover (DOV), Honeywell (HON), or Parker Hannifin (PH), I just can’t get the numbers to work. Of course, I thought that back in late December, and it didn’t keep the stock from outperforming its peers by better than 12%.

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Reputation, Strategic Differentiation Supporting Illinois Tool Works