Illinois Tool Works has been treading water for the past six months, holding steady at $251.69.
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We don't have much confidence in Illinois Tool Works. Here are three reasons why you should be careful with ITW and a stock we'd rather own.
Why Is Illinois Tool Works Not Exciting?
Founded by Byron Smith, an investor who held over 100 patents, Illinois Tool Works (NYSE:ITW) manufactures engineered components and specialized equipment for numerous industries.
1. Core Business Falling Behind as Demand Plateaus
Investors interested in General Industrial Machinery companies should track organic revenue in addition to reported revenue. This metric gives visibility into Illinois Tool Works’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.
Over the last two years, Illinois Tool Works failed to grow its organic revenue. This performance was underwhelming and implies it may need to improve its products, pricing, or go-to-market strategy. It also suggests Illinois Tool Works might have to lean into acquisitions to accelerate growth, which isn’t ideal because M&A can be expensive and risky (integrations often disrupt focus). 
2. Revenue Projections Show Stormy Skies Ahead
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Illinois Tool Works’s revenue to drop by 1%, close to its flat sales for the past two years. This projection is underwhelming and suggests its newer products and services will not accelerate its top-line performance yet.
3. Free Cash Flow Margin Dropping
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
As you can see below, Illinois Tool Works’s margin dropped by 2.6 percentage points over the last five years. If its declines continue, it could signal higher capital intensity and investment needs. Illinois Tool Works’s free cash flow margin for the trailing 12 months was 17.9%.
Final Judgment
Illinois Tool Works isn’t a terrible business, but it doesn’t pass our quality test. That said, the stock currently trades at 23.6× forward price-to-earnings (or $251.69 per share). At this valuation, there’s a lot of good news priced in - we think there are better opportunities elsewhere. We’d recommend looking at our favorite semiconductor picks and shovels play.
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