For those readers who find it difficult to distinguish between comments about a company and comments about a stock, let me be perfectly clear - Illinois Tool Works (NYSE:ITW) is an excellent company in many respects. That said, the company's market exposure and growth outlook leave the stock stuck in that gray area where it is a worthwhile stock to hold, but not a compelling candidate for new purchases.

So-So Growth, Good Efficiency
Illinois Tool Works reported revenue growth of over 6%, but organic growth came in at just above 3%. That's not particularly impressive in a quarter where other industrial conglomerates like General Electric (NYSE:GE) and Dover (NYSE:DOV) reported organic growth of 11% and 9%, respectively, though it must be observed that Danaher (NYSE:DHR) and United Technologies (NYSE:UTX) had even more modest growth.

While revenue growth was modest, operating efficiency was solid yet again. Gross margin improved slightly and the company reported 7% operating income growth. It's also worth noting that every operating unit reported higher margins except for construction and "other."

See: DCF Analysis: The Forecast Period & Forecasting Revenue Growth.

Geography Not Helping
I have previously expressed some concerns about Illinois Tools Works' hefty exposure to Europe, and some of that came home to roost this quarter. While overall international organic revenue was flat, Europe was down about 1%. Admittedly, that's not terrible, but it's a risk factor as many European industrial companies start to back away from initial expectations of a second-half recovery. By way of comparison, ITW has much higher exposure to Europe than conglomerates like Ingersoll-Rand (NYSE:IR) and GE.

Although ITW's Asian businesses saw 3% organic growth, the company is relatively under-exposed to Asia in comparison to Dover and GE. Given the dynamics of this region and the likely future demand for construction materials, packaging, autos, and frankly most of what ITW manufactures, expanding this sales base needs to be a priority.

See: How Globalization Affects Developed Countries.

With ITW's strong performance in welding (18.6% organic growth), it looks like Miller continues to gain share and leverage the industrial recovery in North America and the worldwide growth in energy projects. While ITW's food equipment business was soft overall, North American growth was solid and that augurs well for Middleby (Nasdaq:MIDD).

Elsewhere, ITW's performance seems to fit in with other reports seen so far. ITW's electronics business fared poorly, but this is a tough market for players as diverse as Danaher and DuPont (NYSE:DD). While the 1% growth in construction seems a little soft, reports this quarter so far have been all over the map for those companies with construction market exposure.

The Bottom Line
ITW management also gave more insight into their restructuring plans; plans that will include combining some business units, focusing on more efficient group sourcing and evaluating the portfolio in terms of long-term potential. Two out of the three make eminent sense; combining smaller businesses is something of a risk as it is a step back from a decentralized corporate culture that has largely worked well for a long time.

The trouble with Illinois Tool Works today is that even a fairly robust forward growth estimate (nearly 9% compound free cash flow growth over the next decade) doesn't create an especially exciting fair value estimate today. While that growth estimate looks a bit inflated due to the fact that the last couple of years of free cash flow have been below-trend, the fact remains that it's hard to push fair value much past the mid-$60s and that doesn't seem like enough margin of safety when stocks like GE are meaningfully cheaper.

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Tickers in this Article: ITW, DHR, GE, DOV, UTX, IR

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