EUR 850.00 For Business Accounts Only

Morningstar | No Surprises in ITW's Latest Results As Our Long-Term Thesis Remains Intact

We view Illinois Tool Works as a well-run collection of moaty businesses. The company focuses on niche markets, with most of its activities centered on resolving its most valuable customers’ pain points. ITW’s products and services are designed to reduce customers’ costs, either through ease of use, which cuts down on training costs, ensuring compliance with environmental and safety standards through quality products, or eliminating steps in a manufacturing process or parts in an assembly.Unlike its competitors, the firm’s innovation efforts are incremental, often adding small, but effective twists to its existing product line, allowing it to spend far less on research and development. Further, a number of patents and trade secrets protect these innovations from intellectual property theft. These factors allow the company to charge a premium relative to competitors’ products, which we believe contributes to the firm’s GAAP operating margins of over 24% based on the firm's 2018 results.We think the firm’s margin expansion story will continue, particularly as it continues narrowing its focus on its most important customers and simplifying its product line by eliminating products. We model an over 300-basis-point improvement from current levels by 2022 (between 27% and 28%). We also believe ITW’s renewed focus on the markets it knows best will help generate positive organic growth. ITW’s end markets have several attractive long-term secular trends, including the advent of lightweight electronic vehicles, growing food health and safety regulations, increased demand for energy-efficient products, an increasing shortage of skilled labor in the United States, and increased urbanization and infrastructure development in emerging economies. Independent of general market growth, however, we think ITW’s emphasis on customer-backed innovation should allow it to gain some modest market share from competitors, particularly on the strength of its differentiated offerings. While some competitors may exhibit faster growth characteristics, we like ITW’s focus on predictable, high-quality growth and its unwillingness to compromise its strategy for the latest trend.