Illinois Tool Works (ITW): Buy, Sell, or Hold Post Q2 Earnings?

Illinois Tool Works has been treading water for the past six months, holding steady at $259.78. The stock also fell short of the S&P 500's 16.6% gain during that period.

Is now the time to buy Illinois Tool Works, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team's opinion, it's free.

We're passing on Illinois Tool Works for now. Here are three reasons why ITW doesn't excite us, plus one stock we'd rather own.

In addition to reported revenue, organic revenue is a useful data point for analyzing General Industrial Machinery companies. 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).

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 4.1%. Although this projection suggests its newer products and services will spur better top-line performance, it is still below the sector average.

We track the long-term change in earnings per share (EPS) because it highlights whether a company's growth is profitable.

Illinois Tool Works's EPS grew at 5.6% compounded annual growth rate over the last five years. On the bright side, this performance was better than its 3.3% annualized revenue growth and tells us the company became more profitable on a per-share basis as it expanded.

Illinois Tool Works isn't a terrible business, but it doesn't pass our bar. With its shares lagging the market recently, the stock trades at 22.7× forward P/E (or $259.78 per share). Beauty is in the eye of the beholder, but we don't really see a big opportunity at the moment. We're fairly confident there are better investments elsewhere. Let us point you toward the most dominant software business in the world.

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