As The Auto Industry Grows, So Does Illinois Tool Works

April 10, 2012  |  about: ITW

                                         

Illinois Tool Works (ITW) manufactures engineered products for industrial, construction, and electronic markets. Its business strategy is to focus on a few products that command the most in sales. The company operates in 57 countries. It is divided into 8 major segments and they are well balanced in bringing in revenue.

Back in February, Bank of America gave a price projection for Illinois Tool Works of $64. There is a reason for this. Here's what they wrote:

In 2011, ITW derived roughly 18% of sales from auto end markets (over half in North America). In turn, ITW appears best positioned to benefit from improving sentiment toward NA auto markets.

One of the company's segments called "Transportation" is what they are referring to. It manufacturers fasteners, components, fluids, and polymers. 84% of the sales are to automotive OEMs and after-market customers.

This is a strong, well run company. It has cash and is financially solid. If we compare some main financial ratios to the Diversified Machinery industry of which it is part, we can see how it leads the industry. Let's look at three main ratios:

• Debt/Equity: the higher the ratio, the more debt is being financed through creditors.
• Current Ratio: measures the company's ability to pay off short term debt. The higher the ratio the more liquid the company is.
• Interest Coverage ratio: meeting its interest payments, the lower the more debt burden the company has. The higher the ratio the better a company's ability to meet debt and interest payments.

Debt/Equity: ITW- 0.4 Industry- 2.42

Current Ratio: ITW- 2.3 Industry- 1.00

Interest Coverage Ratio: ITW- 14.1 Industry- 6.6

2012 looks bright for the company. Not only is the automotive industry looking better this year and that helps in sales, but the company is very healthy financially. If anyone were to look for a solid company that pays out a 2.80% dividend and is set up for growth, this is the company. It is well worth an investor's time to get to know it.

By John Mylant

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.