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Illinois Tool Must Work Harder

Don't mistake what I'm saying as an explicit "sell" recommendation. I just don't believe that the company's 9-month revenue performance of $10.6 billion, which is down 6.5% year over year, should be ignored. Investors argue about the adverse effects of the decorative surfaces divestment. I'm not discounting that. Still, when that business is adjusted out, Illinois Tool still lagged its peers on an organic basis.

Last but not least, in its various end markets, the company is not showing as much leverage as the Street believes is has. It's true that Illinois Tool continues to perform well in areas like automotive, particularly from an organic growth perspective. So has Honeywell (HON). And Illinois Tools continues to be hampered in areas like polymers and fluids.

What's more, unlike Honeywell and General Electric, I believe Illinois Tool lacks the sort of offsetting advantage that would be presented if it were more exposed to areas like aviation. In other words, the company would still be able to produce growth even amid weak periods in construction and electronics markets.

That the shares are nonetheless 5% up since management's performance update suggest that investors don't care much about these sort of details. Worse, the recent optimism assumes that General Electric, Dover and Honeywell will make no strategic adjustments of their own to stunt Illinois Tool's 5-year plan. I don't need to tell you that five years is a long time.

Tuesday, the company will report fourth-quarter and full-year results. The Street will be looking for earnings-per-share of 91 cents on revenue of $3.52 billion, which would represent a year-over-year revenue decline of 16.5%. Here again, I don't want to exaggerate the magnitude of a 16% revenue decline. But it's a 16% revenue decline. I don't know of any other way to say it.

The five-year plan is all well and good. And I also appreciate the margin improvement seen as a result of the ongoing restructuring. It shouldn't, however, absolve management from any near-term growth expectations - much less from company shares are trading with growth already priced in. All told, other than the 2% dividend yield, there's no compelling reason to buy this stock until revenue growth returns.

At the time of publication, the author held no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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