Welcome back, me! Thanks to the many kind words from readers who missed my daily missives … we’re back on schedule now, and ready to again amuse, delight, and hopefully enrich you every day. Or almost every day, at least.
And today, we spin the big teaser wheel and the ticking stops at Elliott Gue — he’s got a teaser running for his Personal Finance newsletter … and while we’ve identified several of his picks before, including his “resource depletion” ideas back in August and, for a different one of his newsletters, his “Rockefeller takeover target” just a few weeks ago.
Today, I’m reading that he thinks that business confidence will shoot up in the months ahead thanks to gridlock after the election, and that he’s got at least one “bonus” idea that he thinks will perform well in that environment. So let’s sniff out exactly which stock that is, shall we?
Here’s how Gue briefly sets the stage:
“I’m telling them—and you—to expect confidence to shoot up after the November election.
“Reason: The extravagant spending and enactment of entitlements that fueled business distrust of Washington will almost certainly end when the election dust settles. Politicians from both parties know the nation has little stomach for big spending.
“Large and small business alike will view this as reassurance that government will be unwilling—or unable—to spend recklessly. Not because of suddenly acquired wisdom—because of good old-fashioned gridlock and fear of losing their office.
“This will act like a shot of B-12 in the arm for companies holding cash, but fearful of investing for future growth. With the fear eased—or removed—watch them take off!”
So, a logical argument, though I don’t know if things will work quite that cleanly. What, then, is his stock pick for this environment?
“We’re buying this company because it’s a perfect fit for our strategy. It features seven business segments—transportation, industrial packaging, food equipment, power systems and electronics, construction products, polymers and fluids, and decorative products.
“We love how its revenues are evenly spread across all segments, none of which accounts for more than 15 percent of the overall top line.
“Best of all, revenues keep rising boosted by an overseas tailwind that allows the company to generate almost 60 percent of its revenues outside the U.S.—as it waits for the economy here at home to rev up.
“When the post-election confidence injection kicks in: watch out! Profits will soar to even greater heights.”
So who is it? The Thinkolator tells me that this must be …
Illinois Tool Works (ITW)
ITW is an industrial conglomerate, a company that has quietly grown by acquiring small manufacturers and similar companies over the past couple decades, and it’s their skill at integrating and optimizing the operations of their acquired companies that stands out as their strongest asset. The seven main divisions do match up pretty precisely with the teaser, and Illinois Tool Works does have both a very broad footprint and a large international presence (they own 825 “business units” in 52 countries).
This is, at the very least, an interesting company — they’re big, with a market cap of about $20 billion, but they believe in small: they like to manage small, niche companies with high-margin products that have a strong market position, so they own dozens of valuable brands (though as an industrial company, none of them are brands that most of us would recognize). And when their companies or segments get too big, they break them up into smaller divisions to make sure that the focus is always at the local level and on the division’s customers.
They have been very cyclical, as an industrial company that supplies many products to other small manufacturers and similar firms around the world (one of their most famous products, by way of example, is the little plastic buckle that’s on almost every backpack), and they took a big hit in 2009 … but they are storming back pretty nicely in a cyclical recovery, and they did still manage to post pretty solid free cash flow even last year. Unlike companies that seem to “manage” their earnings precisely, Illinois Tool Works pretty consistently reports far higher free cash flow than they do earnings, which is encouraging. They also have a generally good reputation and solid balance sheet, with a very manageable amount of debt. The shares trade at a slight premium to the PE ratio of the S&P 500 (ITW has a trailing PE of 16), but analysts see the growth that they’re experiencing this year continuing pretty nicely — they’re expected to top out at as much as 60% earnings growth thanks to the recovery for this full year, and to grow again by 20% next year, which is pretty heady earnings growth for a $20 billion company (that means the forward PE is a bit under 14).
And yes, ITW also pays a very decent dividend of just under 3% and is a dividend growth champion — they bumped up the dividend quite nicely this year, more than 10% … the dividend growth may not remain at that level, but they have raised the dividend every year for nearly 50 years and that’s not a pattern that companies like to break unless they absolutely have to. So ITW is not likely to be a barnburner, but Morningstar does peg its fair value at $60 and the price (at just under $50) does seem reasonable for the kind of continued growth and steady performance that this company has provided for much of its hundred+ years — which means that probably investors are nervous about their big earnings dip in 2009, or they’re worried about the impact of another possible down cycle on ITW’s numbers.
As for me, I haven’t looked at ITW in years, not since they acquired a stock I owned back in 2006 … but I think I will dig in and take a deeper look now. What do you think? Let us know with a comment below.