Goldman Downgrades Illinois Tool Works, Credit Suisse Lowers Price Target After Sales, Guidance Miss

Illinois Tool Works Inc. ITW reported second-quarter results that sent the stock lower Monday and prompted a downgrade from Goldman Sachs and a price target reduction from Credit Suisse. 

The Analyst

Goldman Sachs' Joe Ritchie downgraded Illinois Tool Works from Buy to Neutral with a price target lowered from $167 to $145. The stock was removed from Goldman Sachs' Conviction List. 

Credit Suisse's Jamie Cook maintained a Neutral rating on Illinois Tool with a price target lowered from $166 to $146.

Goldman Sachs: Less Conviction

Illinois Tool has reported two consecutive disappointing quarters, Ritchie said in the downgrade note. (See the analyst's track record here.)

The manufacturer has lifted its margins every quarter since the fourth quarter of 2013, but has now fallen short of expectations in the first and second quarter due to price and cost headwinds, the analyst said. 

Illinois Tool highlighted expenses from growth investments for the first time, which could signal ongoing margin woes for at least the near-to-mid term, Ritchie said.

The company is now a "show me story," and its management needs to offer a strong fourth-quarter and 2019 guidance to maintain some confidence in the stock, he said. Illinois Tool will have the opportunity to do so in its Q3 report or its investor day presentation in December, but until then, expectations for a differentiated margin or EPS growth have diminished, according to Goldman Sachs. 

Credit Suisse: 'Concerns Ahead'

Illinois Tools managed to hit the high end of its organic growth guidance and maintained its full-year organic guide, Cook said in a research report. (See the analyst's track record here.) 

The company saw 13-percent growth in its welding business, and test, measurement and electronics and specialty were up by 4 percent. Yet the consumer-facing business saw weakness, and total margins were lower on material costs and pricing, the analyst said. 

Investors have reason to be concerned about the company's organic growth story, and expectations for a 100-basis point improvement in fourth quarter margins "seem high in our view," Cook said. 

Related Links:

Benzinga's Top Upgrades, Downgrades For July 24, 2018

10 Biggest Price Target Changes For Tuesday

Photo by Rawlplug/Wikimedia.