EUR 850.00 For Business Accounts Only

Morningstar | Illinois Tool Works 2018 3Q Preview

Illinois Tool Works is in the latter stages of its Enterprise Strategy--a major business level reorganization and realignment program begun in late 2012 that has the overarching annual goal of delivering above-GDP rates of organic growth combined with best-in-class margins and returns.ITW operates seven business segments of roughly similar scale, and segment revenue ranges from $1.5 billion-$1.6 billion (Welding, Construction Products) to $2.9 billion (Automotive OEM) with operating margins for six of the seven ranging between 22%-25% (margin in Test & Measurement is roughly 19% and in Polymers and Fluids roughly 20%). While some segments have a traditional tight product and end market focus (Automotive OEM, Construction Products, Food Equipment), others serve highly diverse end markets but share a common production platform (Polymers and Fluids, Electronics). A couple comprise a collection of profitable niches (Test & Measurement, Specialty Products).As part of its Enterprise Strategy, ITW utilizes an 80/20 business process, in which resources are dedicated to the 20% of customers, products, and processes that drive 80% of revenue and profits. ITW's 80/20 review of its own business structure has improved performance and has structurally raised its returns on capital, in our opinion. ITW's current five-year plan began in 2013 and included divesting its most commodified and slowest-growth businesses, simplifying its structure by reducing its division count to 85 currently from 800 and by streamlining product lines within each division, with SKUs declining by 80% or more in many cases. This simplified structure has enabled ongoing efficiency gains in staffing, purchasing, and logistics.ITW’s main remaining challenge is to improve persistently slow top-line growth, a task complicated by a backdrop of sluggish industrial demand and low commodity prices. We expect ITW to rely on close relationships and a culture of innovation to grow with its largest customers. While the priority is on organic growth, ITW ended a multiyear embargo in mid-2016 by purchasing ER&C, a German maker of engineered fasteners and connectors for automakers.