Tuesday, August 12, 2008

lllinois Tool Works: Works

Illinois Tool Works (ITW) is the epitome of a capital goods or industrial company. They make products that manufacturers the world over use to make finished goods. Indeed, many investors watch ITW as a barometer of the whole economy because their product line is so diverse and their business so geographically broad.
The company recently posted 17% growth in earnings vs. a year ago and increased their dividend 11%, both slightly higher than market expectations.
ITW serves customers in 50 nations through 800 companies, all engaged in industrial products. About 50% of their earnings come from outside the US. Their presence in Asia and the Far East is growing rapidly.
The Dividend Valuation Model above shows that ITW's price is buried in its value bar. According to our models, that is a sign of undervaluation. Indeed, you have to go back to the early 1990s to find a time when the stock was as cheap as it is today on a relative basis.
Based on the current fiscal year's projected earnings, ITW is selling for under 14X. That is well under its 20-year average PE of nearly 20X. We can find no reason for this cheapening of the stock, and we believe as the market finds its footing and begins to move higher that ITW has a lot of catching up to do.
We own the stock and have for the last couple of years.
For more information on Donaldson Capital Management, please see our website http://www.dcmol.com/.