Download Illinois Tool Works Inc.

ILLINOIS TOOL WORKS INC.
APRIL 23, 2013
Kaushik Andra, Dan Ballantine, & Keaton J. Cervantes
Agenda

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
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
Introduction
Macroeconomic Outlook
Industry Overview
Company Overview
Financial Analysis
Valuation
Recommendation
Illinois Tool Works Inc.



Founded in 1912, headquartered in Glenview,
Illinois
Approximately 60,000 employees
Manufacturer of industrial products and equipment
across 40 different operating segments with
operations in 58 countries
 Decentralized
management structure: contains 8
separate business segments that operate independently

Currently listed on RCMP Watch List
 Last
reviewed in April 2005
Source: Illinois Tool Works 2012 10-K
Macroeconomic Outlook

Industry trend to pursue “Southern Strategy” in the
United States
 Moving

operations to right-to-work states
United States becoming more competitive globally
 Decrease
in energy and input costs
 Foreign worker compensation rising, while US wages
are stagnant
Source: The Wall Street Journal
Macroeconomic Outlook

Improving industrial
output in the United
States
 Industrial
production
nearing 2007-2008
levels
Source: The Wall Street Journal
Macroeconomic Outlook

After strong increase, shipments abroad are
decreasing
Source: The Wall Street Journal
Global Industrial Machinery
Overview



Engine, Turbine, and Related is the largest segment
of the global industrial machinery, accounting for
36.5% of total revenue
Asia-Pacific accounts for 36.8% of total revenue
Mitsubishi Heavy is largest player in the industry,
generating 6.5% of market value
Source: MarketLine
Industry Projection
Source: MarketLine
Industry Forces Analysis
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



Bargaining Power of Buyers: Moderate
 Low switching costs, but typically buyers opting for machinery best suited
to their needs
Bargaining Power of Suppliers: Low
 Commodity inputs with a large number of industry suppliers
Threat of New Entrants: Low
 Highly capital intensive industry
 Requires high amounts of specific knowledge
Threat of Substitutes: Moderate
 Machines expected to work in heavy duty environment
Degree of Rivalry: High
 4 largest players only own 14% of total market share
Source: MarketLine
Company Overview
Source: Illinois Tool Works 2012 Annual Report
Company Overview
Source: Illinois Tool Works 2012 10-K
Current Financial Position
Source: Illinois Tool Works 2012 Annual Report
Financial Highlights
Source: Illinois Tool Works 2012 10-K
Business Risks
Exchange
Rates
Ballooning
pension costs
Low
employee
morale
Divestiture
Failures
Economic
downturn
globally
Failure to
realize
80/20
SWOT Analysis
Strengths
Weaknesses
Opportunities
Threats
• Globally diversified revenue base
• Strong dividend history
• Multiple end markets and product groups
• High number of operating segments and product lines
• Unproven track record of management team
• Very uncertain future due to current strategy
• Divest undesirable business segments to improve margins
• Efficient operations once 80/20 strategy is realized
• Sensitive to a variety of macroeconomic factors
• Exposure to currency risk
• High industry competition
Strategy

80/20 plan
 Focus
on the 20% of business that is responsible for
80% of revenue

Large divestiture planned ahead
 Reduce

business from 800 to 120 business units
Restructure or end industrial packaging segment
 Currently

looking at alternatives
Using more discipline when deploying capital in the
future
Source: Illinois Tool Works Q4 2012 Earnings Presentation,
Illinois Tool Works Barclays Investor Conference
Management Outlook






Anticipated increase of revenues in 2013 by 3-5%
Anticipated 2013 operating margin of 16.5-16.9%
Focus on executing enterprise strategy of
simplifying the business
Improve operating margins to 20% by 2017
Increase future dividends and share buybacks
Looking to divest up to 25% of its remaining
revenue base
Source: Illinois Tool Works Q4 2012 Earnings Presentation
Recent News

Former CEO David Speer passed away in 2012
 New



CEO named in November 2012
Sold 51% stake in Decorative Surfaces business unit
in August 2012
Announced new strategy in August 2012
Q4 2012:
 Revenues
down 2.3% from Q4 2011, operating income
down 5.9%
Source: Illinois Tool Works 2012 Annual Report, Q4
2012 Earnings Presentation
Current Stock Information
Metric
Value
Current Stock
Price
$60.50
Trailing P/E
9.98
Forward P/E
14.21
Dividend
Yield
2.51%
Market Cap
($ millions)
$27,312
Source: Capital IQ, Yahoo Finance
Financial Analysis
Current Ratio
Quick Ratio
Cash Ratio
Gross Profit Margin
Operating Profit Margin
Net Margin
ROA
ROE (Book Value)
Debt/Assets
Debt/Equity
Interest Coverage
Liquidity Ratios
2008
2009
1.21
2.00
0.84
1.36
0.15
0.47
2010
1.93
1.37
0.38
2011
2.30
1.52
0.40
2012
3.00
1.63
1.05
Profitability Ratios
2008
2009
34.58% 34.10%
14.63%
9.99%
8.88%
6.82%
9.88%
6.05%
17.86% 11.49%
2010
35.15%
14.62%
9.75%
9.30%
16.52%
2011
35.24%
15.35%
11.64%
12.10%
21.33%
2012
36.09%
15.88%
16.01%
15.39%
27.86%
Solvency Ratios
2008
2009
0.24
0.19
0.48
0.35
16.19
8.41
2010
0.17
0.30
12.88
2011
0.22
0.40
14.22
2012
0.26
0.48
13.30
Financial Analysis
Accounts Receivable Turnover
Days Sales Outstanding
Accounts Payable Turnover
Days Payables
Fixed Asset Turnover
Total Asset Turnover
Tax Burden
Interest Burden
Operating Profit Margin
Asset Turnover
Leverage
ROE
Activity Ratios
2008
2009
6.40
5.64
57.01
64.67
14.95
13.73
24.41
26.58
8.22
6.76
1.11
0.89
2010
5.96
61.20
13.85
26.36
7.41
0.95
DuPont Analysis
2008
2009
64.60% 78.02%
94.01% 87.58%
14.63%
9.99%
112.41% 86.29%
1.99
1.82
19.82% 10.74%
2010
71.95%
92.68%
14.62%
94.87%
1.73
16.02%
2011
6.47
56.40
15.87
22.99
8.79
1.04
2012
6.45
56.62
16.69
21.87
8.92
0.96
2011
2012
79.87% 79.66%
94.95% 126.55%
15.35% 15.88%
98.90% 92.83%
1.79
1.83
20.64% 27.15%
Comparable Companies
Company
Revenues ($
millions)
Market Cap
($ millions)
Operating
Margin
Cummins Inc.
$17,334
$19,843
11.2%
Danaher Corp.
$18,389
$43,324
17.6%
Honeywell International Inc.
$37,686
$61,088
11.4%
Ingersoll-Rand Plc
$14,035
$18,406
10.9%
Lincoln Electric Holdings Inc.
$2,853
$3,960
13.1%
Parker-Hannifin Corporation
$13,086
$14,285
11.5%
Stanley Black & Decker
$10,191
$15,196
11.2%
Illinois Tool Works Inc.
$17,924
$29,592
15.9%
Source: Capital IQ
Stock Performance
Source: Yahoo Finance
Comparable Company Analysis
Target Company
Illinois Tool Works Inc.
Ticker Symbol
(Exchange)
ITW (NYSE)
Comparable Companies
Cummins Inc.
Danaher Corp.
Honeywell International Inc.
Ingersoll-Rand Plc
Lincoln Electric Holdings Inc.
Parker-Hannifin Corporation
Stanley Black & Decker
CMI (NYSE)
DHR (NYSE)
HON (NYSE)
IR (NYSE)
LECO (NASDAQ)
PH (NYSE)
SWK (NYSE)
Comparable Statistics
High
Median
Low
Mean
Price/Book Forward
Forward
Value
TEV/Sales
TEV/EBITDA Forward P/E
9.90x
1.69x
8.40x
14.21
3.50x
NM
NM
NM
3.90x
19.30x
NM
1.16x
2.25x
1.53x
1.26x
1.33x
1.07x
1.37x
7.60x
10.20x
8.20x
9.00x
8.60x
7.40x
8.20x
12.20
16.88
14.59
14.89
15.27
12.12
13.89
19.30x
3.90x
3.50x
8.90x
2.25x
1.33x
1.07x
1.42x
10.20x
8.20x
7.40x
8.46x
16.88
14.59
12.12
14.26
Source: Capital IQ
Comparable Company Analysis
Multiple
Price/Book Value
Forward TEV/Sales
Forward TEV/EBITDA
Forward P/E
Low
$
$
$
$
Multiple
Price/Book Value
Forward TEV/Sales
Forward TEV/EBITDA
Forward P/E
ITW Implied Share Price
21.32
36.53
52.99
51.60
Implied ITW Share Price
Median
High
$
23.75 $
117.54
$
46.63 $
82.37
$
59.26 $
74.95
$
62.12 $
71.87
Weight
0%
30%
30%
40%
Mean
$
$
$
$
Implied ITW
Share Price
$
54.20
$
50.29
$
61.28
$
60.73
$
57.76
Source: Capital IQ
54.20
50.29
61.28
60.73
Discount Rate
CAPM
Risk-Free Rate
Market Risk Premium
5-Year Beta
CAPM Cost of Equity
1.70%
6.00%
0.80
6.47%
Annual Realized Returns
Year
Return
2012
21.46%
2011
1.99%
2010
73.07%
2009
37.41%
Total Realized Return
114.40%
Arithmetic Average Annual Return
Geometric Average Annual Return
33.48%
16.48%
Source: Yahoo Finance
DCF Analysis
Weighted Average Cost of Capital
Share Price
Shares Outstanding (millions)
Market Value of Equity
$
60.50
451.44
$ 27,312.12
Debt
$ 5,048.00
Percent Equity Weight
Percent Debt Weight
84.40%
15.60%
Cost of Debt
Cost of Equity
CAPM Cost of Equity
ITW Realized Return
Cost of Equity
4.23%
Tax Rate
WACC
6.47%
16.48%
15.48%
32.0%
13.51%
10.00%
90.00%
Cost of Equity
Weightings
DCF Analysis
Illinois Tool Works Inc. Discounted Cash Flow Analysis ($ millions)
2013E
Net Income
Amortization & Depreciation
Capital Expenditures
Changes in Net Working Capital
Less Increases in A/R
Less Increase in Inventories
Plus Increases in A/P
Free Cash Flow
Present Value of FCF
Discount Rate
2015E
2016E
2017E
2,176
652
(380)
2,311
651
(380)
2,354
662
(385)
2,380
665
(385)
2,404
667
(390)
118
11
24
2,601
2,292
(22)
(82)
20
2,499
1,940
20
(10)
4
2,646
1,809
35
(61)
3
2,637
1,588
37
(6)
3
2,715
1,440
Terminal
Value
26,599
14,114
13.51%
Calculation of Implied Share Price
Implied Enterprise Value
$ 23,183
Less Debt
$ (5,048)
Plus Cash
$ 2,779
Implied Market Cap
$ 20,914
Implied Share Price
2014E
$
46.33
Terminal Value
Terminal Growth Rate
3.00%
Decision Drivers

Strengths:
 Improved
operating margins
 Geographically diversified revenue base
 GICS diversification
 Strong dividend history

Concerns:
 Management’s
ability to execute restructuring plan
 Stagnating sales growth in key segments
 Exposure to a number of global macro factors
Recommendation

Valuation Summary
 Current
Stock Price: $60.78 per share
 Comparable Companies Valuation: $57.76 per share
 DCF Valuation: $46.33 per share

Recommendation: WATCH LIST
 Place
on RCMP Watch List
 Consider reviewing again in 18-36 months after
divestiture process is more complete