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Illinois Tool Must Work Harder

NEW YORK (TheStreet) -- With shares of Illinois Tool Works (ITW - Get Report) at near 52-week highs, investors are still celebrating management's five-year strategic plan provided back in December. Although management continues to do a great job executing ahead of the plan, I wouldn't get too excited here just yet.

I have always regarded Illinois Tool as a high-quality industrial name. I just don't believe that revenue growth has come in sufficient quantities - not unlike other industrial conglomerates like General Electric (GE) and Dover (DOV). Plus, on an organic growth basis, Illinois Tool has now posted several consecutive quarters of underperformance. And it doesn't appear that this will be fixed anytime soon.

Organic growth, which measures a company's operational performance using only internal resources and excluding events like acquisitions, is an important metric used to gauge performances of companies that are so well diversified. To that end, given Illinois Tool's breadth of end-market exposure, which includes food equipment, welding, automotive and electronics - areas that have been built via mergers and acquisitions, it's a worthwhile metric.

Secondly, I won't deny that management has done well from the standpoint of profitability. Margins have perked up over the past couple of quarters leading to a profit of $1.27 billion in the October quarter. Unfortunately, this represented a 33% year-over-year decline. And this was even with margin benefits coming from divestments of the decorative surfaces business. Not to mention, any advantages the company realized from the ongoing restructuring.

Despite all of this, I find it remarkable that Illinois Tool stock is near 52-week highs. I realize the company has always enjoyed a certain premium for its quality over the years. There's nonetheless plenty of risk in these shares as all of the good news is now priced in.

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