Illinois Tool Works Inc. ITW is poised to gain from positive momentum in the Automotive Original Equipment Manufacturer (OEM) segment, driven by the electric vehicles market and higher content in the Chinese OEM market. The company is also benefiting from strength in the Specialty Products segment. The segment is being driven by strong momentum in the ground support equipment, specialty films and consumer packaging businesses and increasing demand in the appliance business. 

Growth in the institutional end markets in North America, along with higher demand in the European warewash and cooking end markets, has been aiding the Food Equipment segment. Organic revenues from the segment inched up about 0.3% in the first nine months of the year. Also, strength in the polymers businesses has been aiding the Polymers & Fluids segment. Solid momentum in the fluids businesses, driven by higher demand in Europe arising from growth in the hygiene end market, bodes well for the segment.

Illinois Tool’s focus on cost management and enterprise initiatives is supporting its margin performance. The company is benefiting from its enterprise initiatives, which focus on enhancing operational efficiency, optimizing the supply chain and building innovative solutions based on demand. Its cost of sales decreased 5.2% year over year in the first nine months of 2024.

Also, in the same period, the operating margin of 30.9% increased 450 basis points as enterprise initiatives contributed 130 basis points. The company expects the operating margin to be in the range of 26.5–27% for 2024 compared with 25.1% reported in 2023. Enterprise initiatives are expected to contribute more than 100 basis points to the operating margin in 2024.

The company remains committed to rewarding its shareholders substantially through dividend payments and share buybacks. In the first nine months of 2024, it paid dividends worth $1.3 billion and bought back common stock for approximately $1.1 billion. In August, the company hiked its dividend by 7% to $1.50 per share. In 2024, Illinois Tool expects to repurchase approximately $1.5 billion worth of shares. Exiting third-quarter 2024, the company was left to buy back shares worth $3.9 billion under the 2023 program.

ITW currently carries a Zacks Rank #3 (Hold). In the past year, the company’s shares have gained 14.6%.

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Headwinds Plaguing ITW

However, softness in the MTS test and simulation business and lower demand in the semiconductor and consumer electronics end markets are denting revenues at the Test & Measurement and Electronics segment. Lower demand in North America is affecting the segment’s electronics assembly businesses. Softness in the consumables and equipment business due to declining demand in the commercial, industrial, general industrial, and oil and gas end markets is worrisome for the Welding segment. Lower demand in the United States and European commercial and residential end markets is weighing on the Construction Products segment.

Illinois Tool generates a substantial portion of revenues from international operations. Although international businesses provide geographical diversity, the same exposes the company to unfavorable movements in foreign currencies and geopolitical issues. Also, higher contribution from international operations is detrimental to operating margin expansion, as foreign sales usually carry lower margins than domestic. A stronger U.S. dollar is denting the company’s top line. In the third quarter of 2024, foreign currency translation had an adverse impact of 0.4% on Illinois Tool’s revenues.

Stocks to Consider

Some better-ranked companies are discussed below.

Graham Corporation GHM currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

GHM delivered a trailing four-quarter average earnings surprise of 101.9%. In the past 60 days, the Zacks Consensus Estimate for Graham’s fiscal 2025 earnings has increased 8.4%.

RBC Bearings Incorporated RBC presently carries a Zacks Rank #2 (Buy). The company delivered a trailing four-quarter average earnings surprise of 2.5%.

In the past 60 days, the consensus estimate for RBC’s fiscal 2025 earnings has increased 0.5%.

Kadant Inc. KAI presently carries a Zacks Rank of 2. It has a trailing four-quarter average earnings surprise of 17.2%. 

The Zacks Consensus Estimate for KAI’s 2024 earnings has increased 1.8% in the past 60 days.

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Illinois Tool Works Inc. (ITW) : Free Stock Analysis Report

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Graham Corporation (GHM) : Free Stock Analysis Report

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