I looked at Illinois Tool Works only once in last January. I found company quite interesting, but finally I didn’t buy: I like ITW business for diversity and strong cash generation. I think currently it might be a good time to buy shares but I will patiently wait, maybe special occasion will come sooner… or later. Well I was waiting for better occasion and since that time shares are up around 40%. It happens with my opportunistic approach. Anyway awesome performance of shares, so let’s look closer on current business developments. To read more about principles of business click here.

First of all guidance was raised, which is a good sign:

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We should also note that operating margin is extremely high, which is mainly due to enterprise initiatives. Price/cost/volume/other generally brought neutral impact on margin. That’s good, because it means that change in margin should be sustainable.

We can note in investor’s day presentation that although business improved there is still much space to grow: We have significant opportunity for further improvement before ITW is operating at its FULL POTENTIAL. So far I see no reason to don’t believe in this statement.

This is how company wants to grow in long term:

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YTD shares are up by around 40%, which means that most of this growth is in prices. Another opportunity is that due to heavy buybacks shares are “artificially” going up.

As it comes to financials (estimates):

Market cap ~ $44B

Net debt ~$5B

Dividend yield 2%, low but CAGR is quite high, last year dividend was increased by 18%. Additionally normal buyback $1b, so another 2.5% return (together 4.5%) and also extraordinary buyback… so much cash to shareholders, why I didn’t buy it in January although it was expected??

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Estimated valuation ratios:

EV/EBITDA = 13

P/E = 20

 

2017 should be another very good year:

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Summing up, well I read my January’s note again and I have no idea why I didn’t buy ITW then… when something looks good and reasonably valued I should simply buy it. On the other hand it was time when I was buying ADM, which is also performing quite well. At current prices valuation is reasonable, I see no special occasion, but if I were to take a bet I would say that within one year shares will be traded higher than today.

 

Disclaimer ITW – no position