Goldman Sachs downgraded Illinois Tool Works (NYSE: ITW) to Sell from Neutral and set a price target of $230, citing expectations for below-average growth relative to large-cap cyclical peers. Shares fell more than 2% intra-day following the downgrade.
The analyst said ITW’s organic revenue and earnings growth were likely to continue lagging peers. As one of the last remaining conglomerates in the sector, ITW had previously benefited from a major simplification of its organizational structure, product portfolio, and SKUs, driving approximately 800 basis points of margin expansion between 2012 and 2017.
Since that period, Goldman said organic growth had averaged around 2%, while earnings per share growth of roughly 5.5% had trailed the broader coverage universe. Looking ahead, while Goldman was constructive on an inflection in overall industrial activity, it noted that ITW’s meaningful exposure to consumer end markets could weigh on performance. As a result, the firm expected organic and EPS growth to remain below average over the next two years.
Goldman also saw modest downside risk to earnings estimates and said the stock’s valuation multiple was unlikely to re-rate given the pace of earnings improvement. The $230 price target was based on a 15.0x multiple applied to projected EBITDA for quarters five through eight and implied a 2027 free cash flow yield of approximately 5%.
