Although Illinois Tool Works (currently trading at $260.73 per share) has gained 8.9% over the last six months, it has trailed the S&P 500’s 24.7% return during that period. This might have investors contemplating their next move.
Is now the time to buy Illinois Tool Works, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Is Illinois Tool Works Not Exciting?
We're swiping left on Illinois Tool Works for now. Here are three reasons there are better opportunities than ITW and a stock we'd rather own.
1. Core Business Falling Behind as Demand Plateaus
We can better understand General Industrial Machinery companies by analyzing their organic 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. Projected Revenue Growth Is Slim
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 rise by 3.6%. While this projection indicates its newer products and services will spur better top-line performance, it is still below average for the sector.
3. Recent EPS Growth Below Our Standards
While long-term earnings trends give us the big picture, we also track EPS over a shorter period because it can provide insight into an emerging theme or development for the business.
Illinois Tool Works’s EPS grew at an unimpressive 6.2% compounded annual growth rate over the last two years. On the bright side, this performance was higher than its flat revenue and tells us management responded to softer demand by adapting its cost structure.
Final Judgment
Illinois Tool Works isn’t a terrible business, but it doesn’t pass our quality test. With its shares trailing the market in recent months, the stock trades at 24.5× forward P/E (or $260.73 per share). Investors with a higher risk tolerance might like the company, but we think the potential downside is too great. We're pretty confident there are superior stocks to buy right now. We’d suggest looking at our favorite semiconductor picks and shovels play.
Stocks We Would Buy Instead of Illinois Tool Works
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