ITW Earnings: Despite Stock Decline, We Still Think ITW Remains Overvalued

Nothing in narrow-moat-rated Illinois Tool Works’ ITW latest results materially alters our long-term view. Even on a near-term basis, results were broadly in line with our expectations, as both revenue and GAAP EPS missed our expectations by a negligible 1%. Even so, they mostly followed a typical seasonal pattern. Therefore, we maintain our $203 fair value estimate. While the stock fell nearly 5% on the May 2 trading day, we still think the stock is about 15% overvalued. We value Illinois Tool Works at 21 times our 2023 GAAP EPS estimate of $9.69, just above the midpoint of the company’s revised EPS guidance.

During the quarter, consolidated revenue rose to $4.02 billion, or just over 5% on a year-on-year, organic basis. Segment operating margins rose by 110 basis points to 24.6%, while GAAP EPS rose by 25 cents to $2.33. Leading the way on both an organic top line and operating margin expansion basis was food equipment, though test and measurement and electronics, or TME, also grew strongly on both an organic sales and operating margin basis.

For food equipment, North America grew organic sales by 21%, while service revenue grew organic sales by 19%. Strong organic growth propelled operating margin expansion of 440 basis points to 24.5%. End markets like education and lodging pushed up the segment’s institutional business up by more than 50%, though restaurants were also a strong contributor. Food equipment got solid organic operating leverage of 300 basis-points during the quarter.

TME was a tale of two cities, as test and measurement grew organic sales by 12%, while electronics declined. Even so, organic sales declines in electronics still weren’t enough to erase the segment’s sales gains. And despite seeing its organic top line decline by just over 1%, construction products’ operating margin grew by 290 basis points to 27.6%, a superb result for the segment.