Over the past six months, Illinois Tool Works’s shares (currently trading at $246.98) have posted a disappointing 11% loss while the S&P 500 was down 2.5%. This was partly driven by its softer quarterly results and may have investors wondering how to approach the situation.
Is there a buying opportunity in Illinois Tool Works, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Is Illinois Tool Works Not Exciting?
Even though the stock has become cheaper, we're swiping left on Illinois Tool Works for now. Here are three reasons why you should be careful with ITW and a stock we'd rather own.
1. Core Business Falling Behind as Demand Plateaus
Investors interested in General Industrial Machinery companies should track organic revenue in addition to reported 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 1.3%. While this projection indicates its newer products and services will spur better top-line performance, it is still below average for the sector.
3. Free Cash Flow Margin Dropping
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
As you can see below, Illinois Tool Works’s margin dropped by 1.8 percentage points over the last five years. If its declines continue, it could signal increasing investment needs and capital intensity. Illinois Tool Works’s free cash flow margin for the trailing 12 months was 18.1%.
Final Judgment
Illinois Tool Works isn’t a terrible business, but it doesn’t pass our bar. Following the recent decline, the stock trades at 23.3× forward P/E (or $246.98 per share). This multiple tells us a lot of good news is priced in - you can find better investment opportunities elsewhere. We’d recommend looking at the most entrenched endpoint security platform on the market.
Stocks We Would Buy Instead of Illinois Tool Works
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