Illinois Tool Works Inc. (ITW) recently hosted its Investors Day for 2014. There, the industrial tool maker discussed its growth strategies, with an increased focus on long-term plans. A brief discussion on the same has been provided below:
The company updated its long-term targets, aiming to achieve organic revenue growth of 200 basis points (bps) above global Gross Domestic Product (“GDP”), an approximate operating margin of 23% and return on invested capital (“ROIC”) of above 20% by the end of 2017. Beyond 2017, shareholder returns are expected within 12−14% while organic revenue growth rate (assuming 3% global GDP) is anticipated at roughly 5%.
Also, Illinois Tool Works updated its enterprise initiatives, adopted in 2012, to combat difficulties arising from stiff competition and its complex, fragmented business structure. The company has completed nearly 30 divestitures since 2011, as part of its Portfolio Management strategy. It anticipates a drag of roughly 100 bps on organic revenue growth in 2015 and lesser in 2016. The strategy has solidified growth opportunities for the company’s seven segments.
Under its Business Structure Simplification strategy, Illinois Tool Works completed its business integration by merging 800 divisions to form 89, by 2013 end. The company aims to further simplify its business through this strategy in 2015. Lastly, as part of its Strategic Sourcing plan, the company better managed raw materials and other costs, progressing well toward achieve 1% annual savings on total spend.
Overall, this strategic trio is expected to save approximately $600−$800 million in structural costs, enabling Illinois Tool Works to achieve its targets of 23% operating margin and +700 bps operating margin improvement by 2017.
Illinois Tool Works also communicated its preference toward making bolt-on acquisitions for development of core segments as well as creation of new platforms for expanding long-term growth opportunities. Progressing well on its enterprise strategies, the company anticipates achieving the set targets soon.
For 2015, Illinois Tool Works predicted earnings within $5.15−$5.35 per share, reflecting year-over-year growth of 12−16%. Expected earnings headwinds include 15 cents per share from foreign currency translation and 5 cents from pension expenses.
Total revenue growth is estimated in the range of 0.5−1.5%, including 2.5−3.5% organic revenue growth and 2% negative impact from acquisitions. Operating margin is likely to be roughly 21% with 100 bps contribution from enterprise initiatives. The company anticipates returning $2 billion to its shareholders via $1.5 billion share buybacks and $0.5 billion of dividend payment.
For 2014, Illinois Tool Works reaffirmed its forecasts at $4.57−$4.65 for earnings per share, $14.5 billion for revenue, roughly 20% for operating margin and 18−19% for adjusted ROIC.
With a market capitalization of $37.8 billion, Illinois Tool Works currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the industry include Blount International Inc. (BLT), Barnes Group Inc. (B) and EnPro Industries, Inc. (NPO). While Blount International sports a Zacks Rank #1 (Strong Buy), both Barnes Group and EnPro Industries hold a Zacks Rank #2 (Buy).
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