Illinois Tool Works, 'The Gold Standard,' Initiated With A Buy At BofA

Illinois Tool Works Inc. ITW hosted its 2017 investors day Dec. 1 and projected 8-10 percent earnings per share growth each year.

The Analyst

Bank of America Merrill Lynch's Ross Gilardi initiated  coverage of Illinois Tool Works with a Buy and $190 price target. 

The Thesis

The price target is based on 24.5 times 2019 price-to-earnings, implying a 2-percent dividend yield, Gilardi said. (See the analyst's track record here.)

BofA projects the organic revenue growth to accelerate to 3-5 percent annually versus 2017 growth of 2.5 percent and flat growth in 2015-2016. The valuation has shown strong historical correlation with return on invested capital, or ROIC, and operating margin, Gilardi said. 

Gilardi forecasts a ROIC increase of 560 bp to 31.1 percent by 2020 and said he expects to see a higher PE and EV/EBITDA multiple as a result. Tax reform could decrease Illinois Tool Works' rate from 29 percent to the low 20-percent range, translating to $0.50 to $0.60 earnings per share increase, the analyst said. 

The Price Action

Illinois Tool Works was down less than 1 percent at $165.14 Monday. It has gained around 35 percent year to date.

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