Manufacturing company Illinois Tool Works (NYSE:ITW) fell short of the market’s revenue expectations in Q4 CY2024, with sales falling 1.3% year on year to $3.93 billion. Its GAAP profit of $2.54 per share was 1.9% above analysts’ consensus estimates.
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Illinois Tool Works (ITW) Q4 CY2024 Highlights:
- Revenue: $3.93 billion vs analyst estimates of $3.99 billion (1.3% year-on-year decline, 1.4% miss)
- EPS (GAAP): $2.54 vs analyst estimates of $2.49 (1.9% beat)
- EPS (GAAP) guidance for the upcoming financial year 2025 is $10.35 at the midpoint, missing analyst estimates by 2.8%
- Operating Margin: 26.2%, up from 24.8% in the same quarter last year
- Free Cash Flow Margin: 25.3%, up from 22.8% in the same quarter last year
- Organic Revenue was flat year on year, in line with the same quarter last year
- Market Capitalization: $75.21 billion
“ITW delivered a solid finish to the year as we outperformed underlying end markets, expanded operating margin by 140 basis points, generated record free cash flow, and delivered seven percent earnings per share growth in the fourth quarter,” said Christopher A. O’Herlihy, President and Chief Executive Officer.
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.
General Industrial Machinery
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.
Sales Growth
Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Unfortunately, Illinois Tool Works’s 2.4% annualized revenue growth over the last five years was sluggish. This was below our standards and is a rough starting point for our analysis.
Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Illinois Tool Works’s recent history shows its demand 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 missed Wall Street’s estimates and reported a rather uninspiring 1.3% year-on-year revenue decline, generating $3.93 billion of revenue.
Looking ahead, sell-side analysts expect revenue to grow 2.2% over the next 12 months. While this projection suggests its newer products and services will catalyze better top-line performance, it is still below the sector average.
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Operating Margin
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 24.6%. This result isn’t surprising as its high gross margin gives it a favorable starting point.
Analyzing the trend in its profitability, Illinois Tool Works’s operating margin rose by 3.9 percentage points over the last five years, showing its efficiency has improved.
This quarter, Illinois Tool Works generated an operating profit margin of 26.2%, up 1.4 percentage points year on year. Since its gross margin expanded more than its operating margin, we can infer that leverage on its cost of sales was the primary driver behind the recently higher efficiency.
Earnings Per Share
We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.
Illinois Tool Works’s EPS grew at a decent 8.6% compounded annual growth rate over the last five years, higher than its 2.4% 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 to better understand the drivers of its performance. As we mentioned earlier, Illinois Tool Works’s operating margin expanded by 3.9 percentage points over the last five years. On top of that, its share count shrank by 8.4%. These 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 shorter period to see if we are missing a change in the business.
For Illinois Tool Works, its two-year annual EPS growth of 9.5% is similar to its five-year trend, implying stable earnings power.
In Q4, Illinois Tool Works reported EPS at $2.54, up from $2.38 in the same quarter last year. This print beat analysts’ estimates by 1.9%. Over the next 12 months, Wall Street expects Illinois Tool Works’s full-year EPS of $11.72 to shrink by 9.8%.
Key Takeaways from Illinois Tool Works’s Q4 Results
We struggled to find many positives in these results. Although its EPS beat, its revenue missed and its full-year EPS guidance fell short of Wall Street’s estimates. Overall, this was a weaker quarter. The stock traded down 3% to $246.80 immediately following the results.
Illinois Tool Works may have had a tough quarter, but does that actually create an opportunity to invest right now? What happened in the latest quarter matters, but not as much as longer-term business quality and valuation, when deciding whether to invest in this stock. We cover that in our actionable full research report which you can read here, it’s free.