Illinois Tool Works (ITW): OK despite the housing downturn

Posted Nov 19th 2007 4:56PM by Zack Miller
Filed under: Stocks to Buy

While watching the Detroit Lions lose to the New York Giants, I was struck with a strange feeling. Once again, Detroit, the historical center of American business through the auto industry, will lose out to New York, the financial epicenter of the world. While millions of heartland Americans are stuck with mortgages they're struggling to pay back, New York and its financial machine continues to roll.

It's amazing how twisted stock picking can get after a couple of cold ones.

In all seriousness, I've been looking through a lot of the mess in housing and auto, and I have to admit, it's pretty slim pickings. What I did find, and my loss for not knowing about this jewel before, is a nifty company called Illinois Tool Works (NYSE: ITW). This company competes in industrial products in markets including welding, food equipment, polymers, industrial, construction, auto, and packaging. This company reminds me of the diversity of a General Electric (NYSE:GE) or Tyco (NYSE: TYC).

Not the most exciting stuff, but ITW has done well by investors. Over the past ten years, this steady grower returned over 11% per year on average. I found a couple things interesting about this stock:

While the U.S. continues to show negative housing growth, the company's North American Real Estate division appears to have turned the corner.
With exposure to the North American Big 3 auto manufacturers, investors have been cautious on the company. I like that ITW has significant exposure to the foreign market and is indeed, seeing good growth internationally.
The company employs an 80/20 business model. That is, the company attempts to provide 80% of its growth through organic means while deploying its cash to buy profitable businesses on the cheap to provide the other 20% of growth. The pipeline is strong, with $1 billion worth of deals in the wings.
I personally like exposure to end markets that everyone is sour on. Yes, real estate stinks right now and yes, the U.S. auto market is in a lot of trouble. ITW has proved they can make money and deploy their assets profitably by finding new revenue streams.

Buying revenue streams at 1x on a price-to-sales ratio is a good hedge, but investors should be aware that a recession or the inability to make cheap acquisitions would negatively affect this stock.

So, Motor City fans may be disappointed with their Lions losing, but Illinois Tool Works could be a winner for Americans looking for a nice industrial play.

Zack Miller is the Managing Editor of IsraelNewsletter.com and a former equity analyst for a leading multinational hedge fund. Disclosure: Author doesn't own any stocks mentioned in this article but clients who own ITW.

Tags: auto, Illinois Tool Works, IllinoisToolWorks, industrial, investing, ITW, real estate, RealEstate, stock

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Reader Comments (Page 1 of 1)

11-24-2007 @ 11:32AM

John said...

Please do your homework. ITW does not have a "real estate" division. The Company reports results in 4 business segments, none of which are specific to real estate. So, how can you claim that the real estate division has "turned the corner"?

Also, your understanding of the 80/20 business model is incorrect. It has nothing to do with the % of growth that is organic vs. driven by acquisitions. It's a practice that keeps the Company focused on its most profitable products and customers.

11-24-2007 @ 11:46AM

Zack Miller said...

Hi John,
Thanks for your comments - they are quite good. I do know that ITW has four divisions, none of which is specifically real estate. Investment bank research, which I used as input for the above post, breaks down the Engineered Products division revenue into numerous sectors, one of which is Construction (both International vs. Domestic and Residential vs. Commercial).
If you're interested, I'd be happy to send you one of these reports. Specifically, North American Commercial Construction revs trended up 14% in October.
My intention was to describe ITW's "growth by acquisition" strategy and the $1 billion + in acquisition pipeline. You are correct in your description that 80-20 refers to company focus.