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 the Firm (FCFF)

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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 the firm (FCFF) is generally described as cash flows after direct costs and before any payments to capital suppliers.


Intrinsic Stock Value (Valuation Summary)

Illinois Tool Works Inc., free cash flow to the firm (FCFF) forecast

US$ in millions, except per share data

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Year Value FCFFt or Terminal value (TVt) Calculation Present value at 13.15%
01 FCFF0 2,429
1 FCFF1 2,649 = 2,429 × (1 + 9.10%) 2,342
2 FCFF2 2,894 = 2,649 × (1 + 9.24%) 2,261
3 FCFF3 3,166 = 2,894 × (1 + 9.38%) 2,186
4 FCFF4 3,467 = 3,166 × (1 + 9.53%) 2,116
5 FCFF5 3,803 = 3,467 × (1 + 9.67%) 2,051
5 Terminal value (TV5) 120,003 = 3,803 × (1 + 9.67%) ÷ (13.15%9.67%) 64,711
Intrinsic value of Illinois Tool Works Inc. capital 75,665
Less: Debt (fair value) 8,506
Intrinsic value of Illinois Tool Works Inc. common stock 67,159
 
Intrinsic value of Illinois Tool Works Inc. common stock (per share) $214.61
Current share price $217.72

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

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.


Weighted Average Cost of Capital (WACC)

Illinois Tool Works Inc., cost of capital

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Value1 Weight Required rate of return2 Calculation
Equity (fair value) 68,130 0.89 14.55%
Debt (fair value) 8,506 0.11 1.94% = 2.54% × (1 – 23.44%)

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

1 US$ in millions

   Equity (fair value) = No. shares of common stock outstanding × Current share price
= 312,926,939 × $217.72
= $68,130,453,159.08

   Debt (fair value). See details »

2 Required rate of return on equity is estimated by using CAPM. See details »

   Required rate of return on debt. See details »

   Required rate of return on debt is after tax.

   Estimated (average) effective income tax rate
= (19.00% + 22.00% + 23.30% + 24.60% + 28.30%) ÷ 5
= 23.44%

WACC = 13.15%


FCFF Growth Rate (g)

FCFF 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)
Interest expense 202 206 221 257 260
Net income 2,694 2,109 2,521 2,563 1,687
 
Effective income tax rate (EITR)1 19.00% 22.00% 23.30% 24.60% 28.30%
 
Interest expense, after tax2 164 161 170 194 186
Add: Dividends declared 1,483 1,398 1,335 1,186 982
Interest expense (after tax) and dividends 1,647 1,559 1,505 1,380 1,168
 
EBIT(1 – EITR)3 2,858 2,270 2,691 2,757 1,873
 
Short-term debt 778 350 4 1,351 850
Long-term debt 6,909 7,772 7,754 6,029 7,478
Stockholders’ equity attributable to ITW 3,625 3,181 3,026 3,254 4,585
Total capital 11,312 11,303 10,784 10,634 12,913
Financial Ratios
Retention rate (RR)4 0.42 0.31 0.44 0.50 0.38
Return on invested capital (ROIC)5 25.26% 20.08% 24.95% 25.92% 14.51%
Averages
RR 0.41
ROIC 22.14%
 
FCFF growth rate (g)6 9.10%

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).

1 See details »

2021 Calculations

2 Interest expense, after tax = Interest expense × (1 – EITR)
= 202 × (1 – 19.00%)
= 164

3 EBIT(1 – EITR) = Net income + Interest expense, after tax
= 2,694 + 164
= 2,858

4 RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [2,8581,647] ÷ 2,858
= 0.42

5 ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 2,858 ÷ 11,312
= 25.26%

6 g = RR × ROIC
= 0.41 × 22.14%
= 9.10%


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

g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (76,636 × 13.15%2,429) ÷ (76,636 + 2,429)
= 9.67%

where:

Total capital, fair value0 = current fair value of Illinois Tool Works Inc. debt and equity (US$ in millions)
FCFF0 = the last year Illinois Tool Works Inc. free cash flow to the firm (US$ in millions)
WACC = weighted average cost of Illinois Tool Works Inc. capital


FCFF growth rate (g) forecast

Illinois Tool Works Inc., H-model

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Year Value gt
1 g1 9.10%
2 g2 9.24%
3 g3 9.38%
4 g4 9.53%
5 and thereafter g5 9.67%

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 + (g5g1) × (2 – 1) ÷ (5 – 1)
= 9.10% + (9.67%9.10%) × (2 – 1) ÷ (5 – 1)
= 9.24%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 9.10% + (9.67%9.10%) × (3 – 1) ÷ (5 – 1)
= 9.38%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 9.10% + (9.67%9.10%) × (4 – 1) ÷ (5 – 1)
= 9.53%