There’s no question that Illinois Tool Works (ITW) has a cadre of loyal long-term investors, and that loyalty has been earned by years of reliable business performance and margins that are superior to its rivals in pretty much every business in which it participates. Illinois Tool Works has never been particularly strong on growth, but it doesn’t tend to attract investors who want that. Moreover, with the company choosing to forgo margin maximization during the trough, the company may well be able to capture some incremental market share and revenue growth during the recovery.
The problem is valuation, and that problem has become even more acute with another 30% move in the share price since May. I know we are in a period where some are arguing that low interest rates mean that valuation no longer matters. If that’s your position, good luck to you. I’ve seen too many cycles to concur, and even throughout Japan’s long period of low interest rates, valuations have still mattered. Where most high-quality industrials (3M (MMM), Dover (DOV), Eaton (ETN), Fortive (FTV), Honeywell (HON), et al) are priced for mid-single digits annualized returns, ITW has fallen closer to the low-single digits.
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Illinois Tool Works Continues To Defy Gravity, Now Trades At A Rich Sector Premium
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