Illinois Tool Works Offers Sharp Short-Cycle Recovery Exposure, But A Robust Valuation

The problem with saying that “valuation always matters” is that there’s a “when?” part that often goes unsaid. Illinois Tool Works (ITW) has finally started looking a little “mortal” recently with the shares underperforming the broader industrial space since my last update, a bit curious perhaps given the company’s exceptional near-term growth leverage and demonstrated margin excellence.

The long-term track record is still firmly in ITW’s favor, and this isn’t a name I’d bet against. Still, this is a company with less long-term historical organic growth than you might assume, and I’m modestly concerned that the company’s relatively less-attractive end-market exposures may create some modest headwinds. My bigger issue remains valuation – priced for a mid-single-digit total annualized long-term return, I just don’t see enough opportunity here to favor it over other industrials, even with the superior margins and quality ITW offers.

 

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Illinois Tool Works Offers Sharp Short-Cycle Recovery Exposure, But A Robust Valuation