Illinois Tool Works (ITW)

Manufacturing company Illinois Tool Works (NYSE:ITW) met Wall Street’s revenue expectations in Q1 CY2025, but sales fell by 3.4% year on year to $3.84 billion. Its GAAP profit of $2.38 per share was 1.1% above analysts’ consensus estimates.

Company Overview

Founded by Byron Smith, an investor who held over 100 patents, Illinois Tool Works (NYSE:ITW) manufactures engineered components and specialized equipment for numerous industries.

Automation that increases efficiency and connected equipment that collects analyzable data have been trending, creating new demand for general industrial machinery companies. Those who innovate and create digitized solutions can spur sales and speed up replacement cycles, but all general industrial machinery companies are still at the whim of economic cycles. Consumer spending and interest rates, for example, can greatly impact the industrial production that drives demand for these companies’ offerings.

Competitors offering similar products include 3M (NYSE:MMM), Emerson Electric (NYSE:EMR), Stanley Black & Decker (NYSE:SWK), Parker-Hannifin (NYSE:PH), and Eaton Corporation (NYSE:ETN).

A company’s long-term sales performance can indicate its overall quality. Any business can have short-term success, but a top-tier one grows for years. Over the last five years, Illinois Tool Works grew its sales at a sluggish 2.7% compounded annual growth rate. This was below our standards and is a tough starting point for our analysis.

We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Illinois Tool Works’s recent performance shows its demand has slowed as its revenue was flat over the last two years.

Illinois Tool Works also reports organic revenue, which strips out one-time events like acquisitions and currency fluctuations that don’t accurately reflect its fundamentals. Over the last two years, Illinois Tool Works’s organic revenue was flat. Because this number aligns with its normal revenue growth, we can see the company’s core operations (not acquisitions and divestitures) drove most of its results.

This quarter, Illinois Tool Works reported a rather uninspiring 3.4% year-on-year revenue decline to $3.84 billion of revenue, in line with Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to remain flat over the next 12 months. This projection doesn't excite us and indicates its newer products and services will not accelerate its top-line performance yet.

Illinois Tool Works has best-in-class unit economics for an industrials company, enabling it to invest in areas such as research and development. Its margin also signals it sells differentiated products, not commodities. As you can see below, it averaged an elite 42.1% gross margin over the last five years. Said differently, roughly $42.10 was left to spend on selling, marketing, R&D, and general administrative overhead for every $100 in revenue.

This quarter, Illinois Tool Works’s gross profit margin was 43.7%, down 2.3 percentage points year on year. Zooming out, the company’s full-year margin has remained steady over the past 12 months, suggesting its input costs (such as raw materials and manufacturing expenses) have been stable and it isn’t under pressure to lower prices.

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Illinois Tool Works has been a well-oiled machine over the last five years. It demonstrated elite profitability for an industrials business, boasting an average operating margin of 24.7%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Looking at the trend in its profitability, Illinois Tool Works’s operating margin rose by 2.5 percentage points over the last five years, as its sales growth gave it operating leverage.

In Q1, Illinois Tool Works generated an operating profit margin of 24.8%, down 3.6 percentage points year on year. Since Illinois Tool Works’s operating margin decreased more than its gross margin, we can assume it was less efficient because expenses such as marketing, R&D, and administrative overhead increased.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Illinois Tool Works’s EPS grew at a decent 8.1% compounded annual growth rate over the last five years, higher than its 2.7% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

We can take a deeper look into Illinois Tool Works’s earnings quality to better understand the drivers of its performance. As we mentioned earlier, Illinois Tool Works’s operating margin declined this quarter but expanded by 2.5 percentage points over the last five years. Its share count also shrank by 7.9%, and these factors together are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.

Like with revenue, we analyze EPS over a more recent period because it can provide insight into an emerging theme or development for the business.

For Illinois Tool Works, its two-year annual EPS growth of 6.6% was lower than its five-year trend. We hope its growth can accelerate in the future.

In Q1, Illinois Tool Works reported EPS at $2.38, down from $2.73 in the same quarter last year. Despite falling year on year, this print beat analysts’ estimates by 1.1%. Over the next 12 months, Wall Street expects Illinois Tool Works’s full-year EPS of $11.36 to shrink by 8.1%.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Illinois Tool Works has shown terrific cash profitability, putting it in an advantageous position to invest in new products, return capital to investors, and consolidate the market during industry downturns. The company’s free cash flow margin was among the best in the industrials sector, averaging 16.7% over the last five years.

Taking a step back, we can see that Illinois Tool Works’s margin dropped by 1.8 percentage points during that time. If its declines continue, it could signal increasing investment needs and capital intensity.

Illinois Tool Works’s free cash flow clocked in at $496 million in Q1, equivalent to a 12.9% margin. This cash profitability was in line with the comparable period last year but below its five-year average. In a silo, this isn’t a big deal because investment needs can be seasonal, but we’ll be watching to see if the trend extrapolates into future quarters.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Although Illinois Tool Works hasn’t been the highest-quality company lately because of its poor top-line performance, it found a few growth initiatives in the past that worked out wonderfully. Its five-year average ROIC was 31.7%, splendid for an industrials business.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. On average, Illinois Tool Works’s ROIC increased by 4.8 percentage points annually over the last few years. This is a good sign, and we hope the company can keep improving.

Illinois Tool Works reported $873 million of cash and $8.26 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $4.49 billion of EBITDA over the last 12 months, we view Illinois Tool Works’s 1.6× net-debt-to-EBITDA ratio as safe. We also see its $236 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

It was good to see Illinois Tool Works slightly beat analysts’ EPS expectations. On the other hand, its organic revenue slightly missed. Overall, this was a weaker quarter. The stock traded down 1.6% to $238 immediately after reporting.

Updated: May 16, 2025 at 11:37 PM EDT

A common mistake we notice when investors are deciding whether to buy a stock or not is that they simply look at the latest earnings results. Business quality and valuation matter more, so we urge you to understand these dynamics as well.

Illinois Tool Works’s business quality ultimately falls short of our standards. To begin with, its revenue growth was weak over the last five years, and analysts expect its demand to deteriorate over the next 12 months. And while its powerful free cash flow generation enables it to stay ahead of the competition through consistent reinvestment of profits, the downside is its projected EPS for the next year is lacking. On top of that, its flat organic revenue disappointed.

Illinois Tool Works’s P/E ratio based on the next 12 months is 24.1x. This valuation tells us it’s a bit of a market darling with a lot of good news priced in - you can find better investment opportunities elsewhere.

Wall Street analysts have a consensus one-year price target of $247.08 on the company (compared to the current share price of $251.34).

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

To get the best start with StockStory, check out our most recent stock picks, and then sign up for our earnings alerts by adding companies to your watchlist. We typically have quarterly earnings results analyzed within seconds of the data being released, giving investors the chance to react before the market has fully absorbed the information. This is especially true for companies reporting pre-market.