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ITW Revenue

As a value investing shop, we are interested in seeing how ITW’s revenues measure up against past performances. One easily understandable way of doing that is to compare Price to Sales per share levels over a given time frame. Assuming it is available, Ockham prefers to look at ten years of history (for this stock there are 10 years of history available) and we weigh recent years more heavily. This allows us to find weighted average historical high and low Price to Sales ratios, which give us a better idea of the stock’s current underlying value. Using this method, we have established a high range for Price to Sales of 2.12x and the low end of the range at 1.50x.

With respect to these historically rational metrics, notice that the current Price to Sales per share ratio for ITW of 1.14x is well below its normal historic Price to Sales levels. At a price of $40.94, ITW is 38% below where we would expect to see it. Clearly, this stock looks undervalued compared to historical levels, at least on a Price to Sales basis. This will positively affect our analysis because it is rare to find a stock this far below historical norms, and we would expect some price appreciation to bring this metric back towards a more normal range.

ITW Cash Earnings

Looking at ITW specifically in their Cash Earnings capabilities, Ockham views ITW as below its historical average multiple of cash earnings as calculated by Ockham. Similar to our analysis of sales per share, Ockham looks at the last 10 years of cash earnings levels for ITW to identify where the current high and low price levels have been historically in relation to profit per share. Again, we utilize a weighted average methodology which relies more heavily on recent years of data. This weighted average framework provides us with an average high Price to Cash Earnings ratio per share of 14.71 and a 10.38 low over the same period.

At its current price of $40.94, the Price to Cash Earnings ratio of 11.01 per share for ITW is relatively attractive. At current profitability levels, a drop in share price would only improve our future expectations. Again, Cash Earnings is an incredibly valuable metric, and management at ITW must continue on its generation to improve our overall outlook for the stock.

ITW Dividends

While it is not necessary to pay an attractive dividend or a dividend at all, to receive a positive rating from Ockham, we view dividends as an additionally helpful measure in determining the future potential of any company.

In ITW’s case, the estimated annual dividend is $1.24 resulting in a current dividend yield of 3.03%. Similar to our review of Sales and Cash Earnings per share, we evaluate dividend yields from ITW against the historic high and low levels over the past 10 years. The highest dividend yield from ITW over this period was 4.84% while the lowest dividend yield was 1.03% Therefore, the current dividend yield of ITW is above the historical median by 3.24%. This is definitely a positive in our view.