Stock Analysis on Net
Stock Analysis on Net

Illinois Tool Works Inc. (NYSE:ITW)

This company has been moved to the archive! The financial data has not been updated since February 11, 2022.

Present Value of Free Cash Flow to Equity (FCFE)

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In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Free cash flow to equity (FCFE) is generally described as cash flows available to the equity holder after payments to debt holders and after allowing for expenditures to maintain the company asset base.

Intrinsic Stock Value (Valuation Summary)

Illinois Tool Works Inc., free cash flow to equity (FCFE) forecast

US$ in millions, except per share data

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Year Value FCFEt or Terminal value (TVt) Calculation Present value at 14.72%
01 FCFE0 2,128
1 FCFE1 2,801 = 2,128 × (1 + 31.62%) 2,442
2 FCFE2 3,544 = 2,801 × (1 + 26.53%) 2,693
3 FCFE3 4,304 = 3,544 × (1 + 21.43%) 2,851
4 FCFE4 5,007 = 4,304 × (1 + 16.34%) 2,891
5 FCFE5 5,570 = 5,007 × (1 + 11.24%) 2,803
5 Terminal value (TV5) 178,317 = 5,570 × (1 + 11.24%) ÷ (14.72% – 11.24%) 89,755
Intrinsic value of Illinois Tool Works Inc. common stock 103,435
 
Intrinsic value of Illinois Tool Works Inc. common stock (per share) $330.54
Current share price $217.72

Based on: 10-K (reporting date: 2021-12-31).

1 See details »

Disclaimer!
Valuation is based on standard assumptions. There may exist specific factors relevant to stock value and omitted here. In such a case, the real stock value may differ significantly form the estimated. If you want to use the estimated intrinsic stock value in investment decision making process, do so at your own risk.

Required Rate of Return (r)

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Assumptions
Rate of return on LT Treasury Composite1 RF 4.68%
Expected rate of return on market portfolio2 E(RM) 13.78%
Systematic risk of Illinois Tool Works Inc. common stock βITW 1.10
 
Required rate of return on Illinois Tool Works Inc. common stock3 rITW 14.72%

1 Unweighted average of bid yields on all outstanding fixed-coupon U.S. Treasury bonds neither due or callable in less than 10 years (risk-free rate of return proxy).

2 See details »

3 rITW = RF + βITW [E(RM) – RF]
= 4.68% + 1.10 [13.78% – 4.68%]
= 14.72%

FCFE Growth Rate (g)

FCFE growth rate (g) implied by PRAT model

Illinois Tool Works Inc., PRAT model

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Average Dec 31, 2021 Dec 31, 2020 Dec 31, 2019 Dec 31, 2018 Dec 31, 2017
Selected Financial Data (US$ in millions)
Dividends declared 1,483 1,398 1,335 1,186 982
Net income 2,694 2,109 2,521 2,563 1,687
Operating revenue 14,455 12,574 14,109 14,768 14,314
Total assets 16,077 15,612 15,068 14,870 16,780
Stockholders’ equity attributable to ITW 3,625 3,181 3,026 3,254 4,585
Financial Ratios
Retention rate1 0.45 0.34 0.47 0.54 0.42
Profit margin2 18.64% 16.77% 17.87% 17.36% 11.79%
Asset turnover3 0.90 0.81 0.94 0.99 0.85
Financial leverage4 4.44 4.91 4.98 4.57 3.66
Averages
Retention rate 0.44
Profit margin 17.66%
Asset turnover 0.90
Financial leverage 4.51
 
FCFE growth rate (g)5 31.62%

Based on: 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31).

2021 Calculations

1 Retention rate = (Net income – Dividends declared) ÷ Net income
= (2,694 – 1,483) ÷ 2,694
= 0.45

2 Profit margin = 100 × Net income ÷ Operating revenue
= 100 × 2,694 ÷ 14,455
= 18.64%

3 Asset turnover = Operating revenue ÷ Total assets
= 14,455 ÷ 16,077
= 0.90

4 Financial leverage = Total assets ÷ Stockholders’ equity attributable to ITW
= 16,077 ÷ 3,625
= 4.44

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.44 × 17.66% × 0.90 × 4.51
= 31.62%

FCFE growth rate (g) implied by single-stage model

g = 100 × (Equity market value0 × r – FCFE0) ÷ (Equity market value0 + FCFE0)
= 100 × (68,130 × 14.72% – 2,128) ÷ (68,130 + 2,128)
= 11.24%

where:
Equity market value0 = current market value of Illinois Tool Works Inc. common stock (US$ in millions)
FCFE0 = the last year Illinois Tool Works Inc. free cash flow to equity (US$ in millions)
r = required rate of return on Illinois Tool Works Inc. common stock

FCFE growth rate (g) forecast

Illinois Tool Works Inc., H-model

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Year Value gt
1 g1 31.62%
2 g2 26.53%
3 g3 21.43%
4 g4 16.34%
5 and thereafter g5 11.24%

where:
g1 is implied by PRAT model
g5 is implied by single-stage model
g2, g3 and g4 are calculated using linear interpoltion between g1 and g5

Calculations

g2 = g1 + (g5 – g1) × (2 – 1) ÷ (5 – 1)
= 31.62% + (11.24% – 31.62%) × (2 – 1) ÷ (5 – 1)
= 26.53%

g3 = g1 + (g5 – g1) × (3 – 1) ÷ (5 – 1)
= 31.62% + (11.24% – 31.62%) × (3 – 1) ÷ (5 – 1)
= 21.43%

g4 = g1 + (g5 – g1) × (4 – 1) ÷ (5 – 1)
= 31.62% + (11.24% – 31.62%) × (4 – 1) ÷ (5 – 1)
= 16.34%