Trade wars affect Illinois Tool Works

Exchange: NYSE

Sector: Industrial Goods

Industry: Diversified Machinery

Entry strategy

Price: $131–136

Stop-loss: $149.5

Take profit: $92

Investment horizon: until the end of the first quarter of 2019

Company details

Illinois Tool Works Inc. was founded in 1912. Its head office is located in Glenview, Illinois.

    The corporation manufactures and sells industrial products and equipment for 47 industries around the world, including

  • automotive industry,
  • food industry,
  • ventilation,
  • electrical measuring instruments,
  • polymers.

The sale of goods and related services to industrialists is carried out directly and through a network of independent distributors.

The issuer's capitalization is more than $44.25 billion (group +Large).

Company financial performance

Analysts’ consensus forecasts for the financial results of the corporation, at first glance, are optimistic (see Table 1).

Table 1. Analysts' consensus forecast for the financial results of Illinois Tool Works Inc. ($ITW). Source: ReutersOpen original image

For results of the 4th quarter of 2018, analysts, on average, predict a decline in revenue compared to the same period in 2017 by 0.3%. At the same time, it is expected that December earnings per share in 2018 will be at the level of $ 1.82. This is certainly more positive than the loss in 2017, but on average for Illinois Tool Works Inc. this is not the best quarterly result.

    For 2018, it is expected that the company’s revenue will grow 5.5% YoY and + 55% net profit per share will grow 55% YoY — mostly due to

  • more successful 4th quarter in the current year compared to 2017;
  • positive economic effects from the ongoing implementation of a new business management system stated in the updated corporate development strategy of the company.

Illinois Tool Works Inc. financial results over the past 5 years and 5 quarters are presented in table. 2 and tab. 3

Table 2. Annual financial results of Illinois Tool Works Inc. ($ITW) for 2013–2017. Source: MarketWatchOpen original image
Table 3. Quarterly financial results of Illinois Tool Works Inc. ($ITW) for Q3 2017 – for Q3 2018. Source: MarketWatchOpen original image

Illinois Tool Works shares are very expensive according to all financial multipliers (see Table 4).

Table 4. Financial multipliers of Illinois Tool Works Inc. ($ITW). Source: ReutersOpen original image

The main positive factors and expectations of growth in financial results have already been taken into account in stock prices. Significant increase the capitalization of Illinois Tool Works, in our opinion, will be possible if the company will show «earnings surprise» in its financial statements.

However, we don’t really hope for such surprises at the end of 2018. Illinois Tool Works is a large multinational company, which is, most likely, strongly influenced by the negative consequences of global trade wars. It is very likely that we will see a drawdown in the growth rates of the financial results for the whole 2018. We expect that from many other corporations with comparable capitalization.

    In the third quarter of 2018, negative signals and factors appeared that will affect the financial results of the Illinois Tool Works Inc. They include:

  • The significant slowdown in business and sales growth in Europe, China and the Asia-Pacific region amid rising tariffs.
  • The notable increase in cost of sales and operating expenses. They have increased by 5.3% and 0.6% for 9 months of 2018 compares to the same period of the previous year, respectively.
  • The increasing value of the dollar. The growth of the dollar index ($DXY) reduces the value of revenue in other currencies. As a result, revenue and earnings per share of transnational corporations are devalued.
  • Sales of $ITW shares by large investment funds. In the 3rd quarter of 2018, the funds reduced their long positions on this paper by 13%. This is a very bad sign for investors.

Technical analysis (trading plan)

Additional filter for the idea is seasonality. The strength period of the $ITW seasonally begins in April (see Graph 1). Until this time, seasonality does not contradict the idea of sale.

Graph 1. Illinois Tool Works Inc. ($ITW) seasonality. Source: EquityClockOpen original image

Trading plan for the stock:

Graph 2. Technical analysis of Illinois Tool Works Inc. ($ITW). Source: TradingViewOpen original image

Published on the 6th of December, 2018