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Illinois Tool Works Inc. April 23, 2013

Illinois Tool Works Inc. April 23, 2013. Kaushik Andra , Dan Ballantine, & Keaton J. Cervantes. Agenda. Introduction Macroeconomic Outlook Industry Overview Company Overview Financial Analysis Valuation Recommendation. Illinois Tool Works Inc.

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Illinois Tool Works Inc. April 23, 2013

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  1. Illinois Tool Works Inc.April 23, 2013 KaushikAndra, Dan Ballantine, & Keaton J. Cervantes

  2. Agenda • Introduction • Macroeconomic Outlook • Industry Overview • Company Overview • Financial Analysis • Valuation • Recommendation

  3. Illinois Tool Works Inc. • Founded in 1912, headquartered in Glenview, Illinois • Approximately 60,000 employees • Manufacturer of industrial products and equipment across 40 different operating segments with operations in 58 countries • Decentralized management structure: contains 8 separate business segments that operate independently • Currently listed on RCMP Watch List • Last reviewed in April 2005 Source: Illinois Tool Works 2012 10-K

  4. Macroeconomic Outlook • Industry trend to pursue “Southern Strategy” in the United States • Moving operations to right-to-work states • United States becoming more competitive globally • Decrease in energy and input costs • Foreign worker compensation rising, while US wages are stagnant Source: The Wall Street Journal

  5. Macroeconomic Outlook • Improving industrial output in the United States • Industrial production nearing 2007-2008 levels Source: The Wall Street Journal

  6. Macroeconomic Outlook • After strong increase, shipments abroad are decreasing Source: The Wall Street Journal

  7. Global Industrial Machinery Overview • Engine, Turbine, and Related is the largest segment of the global industrial machinery, accounting for 36.5% of total revenue • Asia-Pacific accounts for 36.8% of total revenue • Mitsubishi Heavy is largest player in the industry, generating 6.5% of market value Source: MarketLine

  8. Industry Projection Source: MarketLine

  9. Industry Forces Analysis • Bargaining Power of Buyers: Moderate • Low switching costs, but typically buyers opting for machinery best suited to their needs • Bargaining Power of Suppliers: Low • Commodity inputs with a large number of industry suppliers • Threat of New Entrants: Low • Highly capital intensive industry • Requires high amounts of specific knowledge • Threat of Substitutes: Moderate • Machines expected to work in heavy duty environment • Degree of Rivalry: High • 4 largest players only own 14% of total market share Source: MarketLine

  10. Company Overview Source: Illinois Tool Works 2012 Annual Report

  11. Company Overview Source: Illinois Tool Works 2012 10-K

  12. Current Financial Position Source: Illinois Tool Works 2012 Annual Report

  13. Financial Highlights Source: Illinois Tool Works 2012 10-K

  14. Business Risks

  15. SWOT Analysis

  16. Strategy • 80/20 plan • Focus on the 20% of business that is responsible for 80% of revenue • Large divestiture planned ahead • Reduce business from 800 to 120 business units • Restructure or end industrial packaging segment • Currently looking at alternatives • Using more discipline when deploying capital in the future Source: Illinois Tool Works Q4 2012 Earnings Presentation, Illinois Tool Works Barclays Investor Conference

  17. Management Outlook • Anticipated increase of revenues in 2013 by 3-5% • Anticipated 2013 operating margin of 16.5-16.9% • Focus on executing enterprise strategy of simplifying the business • Improve operating margins to 20% by 2017 • Increase future dividends and share buybacks • Looking to divest up to 25% of its remaining revenue base Source: Illinois Tool Works Q4 2012 Earnings Presentation

  18. Recent News • Former CEO David Speer passed away in 2012 • New CEO named in November 2012 • Sold 51% stake in Decorative Surfaces business unit in August 2012 • Announced new strategy in August 2012 • Q4 2012: • Revenues down 2.3% from Q4 2011, operating income down 5.9% Source: Illinois Tool Works 2012 Annual Report, Q4 2012 Earnings Presentation

  19. Current Stock Information Source: Capital IQ, Yahoo Finance

  20. Financial Analysis

  21. Financial Analysis

  22. Comparable Companies Source: Capital IQ

  23. Stock Performance Source: Yahoo Finance

  24. Comparable Company Analysis Source: Capital IQ

  25. Comparable Company Analysis Source: Capital IQ

  26. Discount Rate Source: Yahoo Finance

  27. DCF Analysis

  28. DCF Analysis

  29. Decision Drivers • Strengths: • Improved operating margins • Geographically diversified revenue base • GICS diversification • Strong dividend history • Concerns: • Management’s ability to execute restructuring plan • Stagnating sales growth in key segments • Exposure to a number of global macro factors

  30. Recommendation • Valuation Summary • Current Stock Price: $60.78 per share • Comparable Companies Valuation: $57.76 per share • DCF Valuation: $46.33 per share • Recommendation: WATCH LIST • Place on RCMP Watch List • Consider reviewing again in 18-36 months after divestiture process is more complete

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