Clockwork Excellence Of Execution From Illinois Tool Works

Stop me if you've heard this before - a well-run global conglomerate is still finding ways to generate decent organic growth and strong operating leverage, but the market already seems to be well ahead in terms of valuation. And so it goes with Illinois Tool Works (ITW). While ITW remains a strong execution story, it's hard to see value in the shares. Still, given ITW's reputation as a great operator leveraged to growth in North America and Western Europe, it won't surprise me if the valuation stays robust as long as the markets remain healthy.

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Clockwork Excellence Of Execution From Illinois Tool Works

3M Comes Back Strong In The Third Quarter

With its high valuation multiples and above-average visibility, 3M (MMM) needed a better result than what it delivered in the second quarter – a quarter that was marked by average organic revenue growth, rare pricing weakness, and weak margin performance. Fortunately, for shareholders, 3M came through and delivered a quarter that, while not perfect, was still quite strong on a relative basis.

Valuation is still problematic. I can’t really come up with a set of circumstances whereby these shares look cheap, so I suppose the argument comes down to some version of “almost of all of its peers are expensive, so if you have to own an expensive stock, why not this one?” I still own these shares myself (but it is not a large part of my portfolio), and I think management still has moves to make to drive better results, but I do worry that today’s valuation is setting the stage for unimpressive returns down the line.

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3M Comes Back Strong In The Third Quarter

Illinois Tool Works Finding It Harder To Clear A Rising Bar

The great post-election melt-up has continued, but the pace seems to be slowing and expectations have risen to a level that many companies are finding more challenging to satisfy. Illinois Tool Works (ITW) has seen its share price rise about 3% since my last update, lagging the S&P 500 only slightly, and keeping pace with most of its large peers (Honeywell (HON), Stanley Black & Decker (SWK), and 3M (MMM)) apart from Dover (DOV).

As I see it, the story on Illinois Tool Works remains more or less the same. The company is unquestionably a high-quality industry conglomerate, but it's not heavily leveraged to recovering markets like oil/gas and important end-markets like autos are slowing. A very strong operator already, I think Illinois Tool Works will be hard-pressed to drive substantial additional restructuring benefits, but management isn't going to stop trying. In a “gotta buy something” market, I suppose Illinois Tool Works isn't the worst idea, but it's hard for me to like the share price outside of a relative value approach.

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Illinois Tool Works Finding It Harder To Clear A Rising Bar

Policy Jitters Creating An Opportunity With Techtronic

Although I don't write on it often, Hong Kong's Techtronic (OTCPK:TTNDY) is a company that I've enjoyed following for a long time. The company behind well-known brands like Ryobi and Milwaukee are tools and Hoover and Dirt Devil in floor care, Techtronic has done a good job over the years of growing revenue and improving margins and ROIC (its performance on free cash flow has been less impressive). What's more, there's still room for the company to gain share in established markets like the U.S., add to its assortment of product offerings, expand into other markets, and drive more operating efficiencies.

The "but" is that investors have been frustrated lately by slower progress on margin improvements and worried about the potential ramifications of the new administration in Washington, D.C. As I don't believe Techtronic has outsized vulnerability to potential trade restrictions, and does have options for dealing with them, I think this could be an opportunity.

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Policy Jitters Creating An Opportunity With Techtronic

Seeking Alpha: Assa Abloy Has Growth Locked Up

Assa Abloy (OTCPK:ASAZY) has a lot of the traits that investors looking for high-quality companies ought to prize. The company generates good returns on capital and consistently generates good cash flow from its revenue base. It also has a market leadership position, but operates in a market that still leaves it ample room to expand and grow. While the organic growth rate has been pretty dismal over most of the past decade, the severe disruptions to the construction markets in Western Europe after the collapse of the credit bubble certainly created some headwinds.

The problem (and if there was ever going to be a Stephen Simpson Seeking Alpha drinking game, this is where you'd take a shot) is valuation. Even amidst the crapalanche that is the year-to-date global equity market, Assa Abloy isn't cheap enough for me. Assa Abloy is almost never cheap, and I won't argue that it should be; it's a well-run company with great share. What's more, North American and Western European non-residential and residential construction look like good markets to be in for 2016. Nevertheless, I just can't connect the dots and come up with a valuation that makes me a willing buyer at today's price.

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Assa Abloy Has Growth Locked Up

Seeking Alpha: Can Tyco Break Out Of A Persistent Lagging Trend?

For a company that is supposed to be in one of the more attractive industrial markets, fire and security, Tyco (NYSE:TYC) hasn't lived up to investor expectations. With weaker than average growth and margins, Tyco has been lagging other fire/security players like Honeywell (NYSE:HON), United Technologies (NYSE:UTX), Stanley Black & Decker (NYSE:SWK), and Allegion (NYSE:ALLE) for some time, not to mention the market as a whole (as measured by the S&P 500).

Can the company reverse this unimpressive trend? I can't immediately think of another company in this size range with as much exposure to the non-residential construction market (though Ingersoll-Rand (NYSE:IR) is close), both here and abroad, and perhaps the protracted lull in that market explains some of Tyco's underpeformance. That said, management needs to address what seems to be an elevated level of corporate expenses and a relatively bad track record of meeting projections.

I don't see a large amount of undervaluation here, but this is a significant "self help" story where outperformance on margins can have a disproportionate benefit on the valuation. It's also arguably still at a size where a larger conglomerate could consider it an acquisition target, particularly with the prospect of rooting out the company's elevated cost structure.

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Can Tyco Break Out Of A Persistent Lagging Trend?

Seeking Alpha: Stanley Black & Decker Doesn't Inspire Yet

Arguably still best known as a power tools and hand tools company, Stanley Black & Decker (SWK) has spent considerable sums on M&A in the name of diversification. Thus far these deals haven't meaningfully helped the company's returns on capital nor its free cash flow generation, due in no small part to ongoing challenges with its Security business. Although Stanley Black & Decker doesn't look unreasonably valued relative to EBITDA and it has significant self-improvement potential, the shares already price in a lot of cash flow-based improvement.

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Stanley Black & Decker Doesn't Inspire Yet

Seeking Alpha: Techtronic Still Worth A Look As A Housing Recovery Play

My Top Idea call on August 20, 2013 to buy Techtronic (OTCPK:TTNDY) worked okay for a while, as the stock rose almost 20% through to year-end. Shortly thereafter, worries about the soundness of the housing play as an investing them started to creep into the market, stimulated by weaker housing starts and existing sales and worries about the economy as a whole. That took a lot of the steam out of Techtronic, as well as rival Stanley Black & Decker (SWK) and major retailing partner Home Depot (HD).

I believe the Techtronic story remains an appealing one. Techtronic has been a share-gainer in the U.S. with its Ryobi and Milwaukee tool lines, and still has yet to really address the European or major emerging markets in a big way. Likewise, I continue to believe that the company can do better with its floor care business, with a resulting uplift to margins. With margins and returns on capital heading in the right direction and a housing market only in the early phases of recovery, I still believe Techtronic has a lot to offer at these levels.

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Techtronic Still Worth A Look As A Housing Recovery Play

Seeking Alpha: Spectrum Brands Has The FCF Juice, But Valuation Is Trickier

Debt-fueled acquisition stories often have unhappy endings, and Spectrum Brands (SPB) has already gotten itself into trouble before. That was then, though, and the company's mix of consumer products (many of which are positioned as leading value brands) has been generating better free cash flow of late. Add in some leverage to the housing recovery through the acquisition of Stanley Black & Decker's (SWK) HHI segment and this is a more interesting story than it was even just a year ago.

It's not a story without some risks. The company has an especially high debt load, and the ownership/intentions of Harbinger Group (HRG) adds an element of uncertainty not present at companies like Jarden (JAH) or Helen of Troy (HELE). Moreover, I wouldn't rule out the risk of Spectrum's brands getting squeezed between consumers still willing (and able) to pay up for the premium brands and those consumers who turn to even cheaper private label or imported brands. Valuation is likewise a tricky matter, as the shares trade above past norms and only look cheap on a cash flow basis if you ignore the large debt load.

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Spectrum Brands Has The FCF Juice, But Valuation Is Trickier

Seeking Alpha: Even After A Big Run, The Housing Recovery Can Take Techtronic Higher

Plenty of stocks tied to housing in one form or another have enjoyed strong rebounds, and toolmaker Techtronic (NASDAQ: TTNDY.PK) is no exception, as the shares have climbed almost 60% this year and nearly 1,000% from the depths of the housing/credit crash. With the remodeling/renovation market only just recovering and new housing construction still to come back, Techtronic should be looking at several years of above-average growth just on the recovery trade.

There's more to Techtronic than just a U.S. housing recovery. Techtronic has started to show progress in dealing with lagging margins and the company has barely scratched the surface of its opportunity in markets like Europe. Although these shares can respond violently to updates on the U.S. housing market, another 25% in the shares seems to be attainable on only relative modest margin improvement assumptions and fully executing on the opportunities in margins and Europe could send the shares as much as 50% higher.

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Even After A Big Run, The Housing Recovery Can Take Techtronic Higher

Investopedia: Home Depot Moves From Good To Great

While it shouldn't really surprise anybody if there's a little volatility or turbulence along the way, it looks like the long-awaited remodeling upturn is firmly in place now. Not only did Home Depot (NYSE:HD) trounce expectations for same-store sales growth, but companies like American Woodmark (Nasdaq: AMWD), RPM (NYSE:RPM), and Stanley Black & Decker (NYSE:SWK) are seeing improved prospects as well. While these shares didn't do much over the last three months and the valuation is not what I'd call “screaming bargain”, I wouldn't step in front of the momentum with my own money.

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Investopedia: Ingersoll-Rand Outperforming As Management Hits Its Marks

Credit were credit is due – Ingersoll-Rand (NYSE:IR) has been in a seemingly never-ending state of restructuring since 2008, but management seems to be hitting its marks recently. Leaner manufacturing, smarter sourcing, a refreshed product line up and solid pricing all seem to be leading to the improved results that have been expected for some time now. Although these shares still don't look particularly cheap, Ingersoll-Rand is heavily leveraged to a recovery in residential housing and commercial construction and continued outperformance on margin targets could very well push the shares higher.

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Investopedia: Stanley Black & Decker Offers Leverage To Construction And Internal Improvements

Investors have already started making moves on the basis of positioning themselves for the expected recovery in U.S. housing, but the leading tool company Stanley Black & Decker (NYSE:SWK) has yet to really go along for the ride. While housing-related stocks like Louisiana-Pacific (NYSE:LPX) and Mohawk (NYSE:MHK) have both nearly doubled over the past two years, Stanley Black & Decker stock is basically where it started.

Some of the lagging performance can be explained with stubbornly low margins and an increasingly debt-heavy balance sheet. At the same time, management has sold some of its housing-related assets and acquired an industrial fasteners business that offers uncertain long-term margins and cash flows at this point. All told, Stanley Black & Decker's stock is a curious proposition – while it is hard to argue that the shares are cheap on the basis of what we've seen recently, a strong recovery in the North American construction market coupled with a return to double-digit free cash flow margins would likely be powerful drivers for the stock.

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Investopedia: Lowe's Had Better Start Improving

It seems like a fuzzy memory now, but Lowe's (NYSE:LOW) was once seen as the superior operator to Home Depot (NYSE:HD) on the big-box home improvement battleground. Times have definitely changed, though, as Home Depot has gained an edge not only with its store locations (more stores in or near urban centers), but also with its merchandising. Making matters worse, Home Depot has significantly closed the gap (if not leapfrogged) Lowe's in an area where Lowe's once dominated – back-office logistics and cost management.

Even if Home Depot has been operationally de-pantsing Lowe's recently, it doesn't show up in the stocks over the last year – they both have nearly equal 60%-plus gains to their credit. Look at the two-year, five-year, or 10-year comparisons, though, and you see a wide gap between the performance of Home Depot and Lowe's (in favor of Home Depot). While there is a lot that Lowe's could do to close the gap and be a relative out-performer, the real question has to be “will they?”

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Investopedia: Home Depot Continues To Rack Up Impressive Numbers

When a company finally gets its operational ducks in a row, the performance can be impressive. Couple that with a rising tide of improving underlying conditions, and the performance can be exceptional. That's the basic thesis on Home Depot (NYSE:HD) these days, as operational improvements started years ago are really bearing fruit and the company is starting to see the positive impact of improving housing markets.

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Investopedia: Stanley Black & Decker And Spectrum Brands Both Get What They Want

Stanley Black & Decker (NYSE:SWK) wants to be involved with businesses with global reach, as well as find a happy medium between consumer, construction and industrial market exposures. Spectrum Brands (NYSE:SPB) wants quality brands that can offset competition from Procter & Gamble (NYSE:PG) and Energizer (NYSE:ENR), while also producing good cash flow. These two wants came together on Tuesday morning with the announcement that Spectrum Brands is buying the Hardware and Home Improvement (HHI) business of Stanley Black & Decker for $1.4 billion in cash.

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Seeking Alpha: Ingersoll-Rand And The Power Of Change

When I last wrote on Ingersoll-Rand (IR) in February, I thought that this industrial conglomerate was the sort of perennial underachiever that could do well if and when management started delivering better results and the market really bought into the idea of reliable improvement. Although it's still early, it looks like Nelson Peltz's involvement with the company has improved sentiment, and it does look like management has credible plans for healing what has been a long record of underperformance.

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Ingersoll-Rand And The Power Of Change

Investopedia: Home Depot Continues To Ride A Stop-Start Recovery

Investors seem to be pretty committed to the idea that a real recovery is underway in America's housing market. While earnings reports from companies like Armstrong World Industries (NYSE:AWI), Mohawk (NYSE:MHK), Masco (NYSE:MAS) and Stanley Black & Decker (NYSE:SWK) did not support an unequivocal bull argument, the stocks recovered pretty quickly.

What's more, leading home improvement retailer Home Depot (NYSE:HD) continues to report rebounding sales in a wide range of housing-related product categories. Although Home Depot shares seem ahead of themselves on valuation alone, momentum will likely stay with the stock until the beat-and-raise pattern is broken.

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Seeking Alpha: Can Stanley Black & Decker Shake Off This Sluggishness?

Given that Stanley Black & Decker (NYSE: SWK) isn't quite as exposed to a U.S. housing recovery as commonly believed, it isn't the uncertain pace there that is keeping growth down. Rather, Stanley Black & Decker is seeing broad-based sluggishness across almost all of its businesses. While further diversification into industrial fasteners makes some long-term sense and the stock's valuation is not demanding, investors will have to have some patience to see this one work out.

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Can Stanley Black & Decker Shake Off This Sluggishness?

Investopedia: Has Home Depot Already Had Its Recovery?

What a difference a year (or three) makes. While the building superstores Home Depot (NYSE:HD) and Lowe's (NYSE:LOW) have definitely taken their licks from the rotten housing market, these companies are well past the worst of the storm. Not only have Home Depot shares more than doubled from their early 2009 lows, but investors have become optimistic to such an extent that the company is posting substantially better results and still missing some estimates.

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