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Tickers in this Article: ITW, UTX, GE, DHR, LECO, ETN, EMR
Whether it's the wrangling over the debt limit in Washington, the ongoing problems in Europe, or the shaky economic data coming out in recent months, institutional investors are playing defense these days. So while it looks like the biggest problem Illinois Tool Works (NYSE:ITW) has is that its early-cycle businesses are slowing and the company is transitioning through the cycle, investors seem to be pretty nervous about the stock, the company, and the broader industrial sector.

TUTORIAL: How To Analyze Earnings

Iffy Second Quarter Results
To be sure, there were some spots on the second quarter for Illinois Tool Works. Reported revenue rose more than 17%, but organic growth was more on the order of 6%. That is really not so bad relative to other large industrial conglomerates like United Technologies (NYSE:UTX), General Electric (NYSE:GE) or Danaher (NYSE:DHR), but it does represent a significant deceleration from the first quarter, and it was not great relative to expectations.

Power systems and electronics was the growth leader, with nearly 12% organic growth. Not surprising in light of Lincoln Electric's (Nasdaq:LECO) earnings, welding was quite strong (up 18% internationally). Industrial packaging and transport also delivered solid organic growth - again not so surprising given results from companies like Actuant (NYSE:ATU), Johnson Controls (NYSE:JCI), and Eaton (NYSE:ETN) in this cycle. Growth in polymers and fluids has slowed down, though, and categories like food service equipment and construction are not performing especially well.

Profits were a mixed bag. Gross margin slid almost a full point and although the company recouped some of that in its operating expenses, operating income growth was less than 14%. Interestingly, there was a fair bit of weakness throughout the segment operating margins. Power systems and electronics showed some modest improvement, but most categories were down year on year.

Figuring out the Guidance
Investor sentiment on Illinois Tool Works was not helped by management's fairly cautious guidance. Now, it is worth mentioning that ITW management has a history of under-promising and over-delivering. What's more, underlying growth guidance looks alright, as the company is moving some disappointing businesses to discontinued operations - again, a move that would be a concern for companies where management doesn't have the same level of credibility.

All in all, though, ITW's results suggest that growth in early-cycle businesses is going to be harder to come by in the coming quarters. With about one-third exposure to early cycle, that means Illinois Tool Works is going to need to see more momentum in those later-cycle industries.

Investors Spoiled For Choice
Investors have quite a few alternatives these days. Names like Emerson (NYSE:EMR), Dover (NYSE:DOV) and SPX (NYSE:SPW) seem to have more exciting near-term prospects in their underlying businesses, and investors may be inclined to take a flier on later-stage companies like Cooper (NYSE:CBE).

The Bottom Line
Illinois Tool Works has never really been a stock that works great as a trade. With a balanced array of businesses, a fairly conservative management team, and a persistent willingness to shuffle units in and out of the company, this is arguably better suited for investors looking for a long-term holding in a company that seems to specialize in innovation within seemingly sedate industries.

Illinois Tool Works isn't the cheapest industrial company to buy today, but it still looks priced to be a solid long-term hold. Investors should be aware that the Street will probably be a little anxious about this name for a couple of quarters, but the post-earnings reaction is not a bad opportunity to accumulate a few more shares. (For related reading, also check out Earnings: Quality Means Everything.)

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