Illinois Tool Works vs. ABB Ltd.: Which Industrial Machinery Stock is a Better Buy?

Headquartered in Zurich, Switzerland, ABB Ltd (ABB) manufactures and sells electrification, industrial automation, and robotics and motion products worldwide. It operates through four segments: Electrification; Robotics & Discrete Automation; Industrial Automation; and Motion. On the other hand, Illinois Tool Works Inc. (ITW) manufactures and sells industrial products and equipment worldwide. It operates through seven segments: Automotive OEM; Food Equipment; Test & Measurement and Electronics; Welding; Polymers & Fluids; Construction Products; and Specialty Products.

The resurgence of COVID-19 cases and rising concerns over the highly transmissible omicron coronavirus variant make investors worried about the economic recovery. In addition, high inflation has contributed to market volatility. However, the Fed’s continued near-zero interest rates, rapid vaccination, and supportive government policies have boosted the industrial machinery sector’s growth. Moreover, the  $1 trillion infrastructure bill passed on November 15 is also expected to boost the industrial machinery sector’s growth in the upcoming months. Therefore, both ABB and ITW should benefit.

ABB has gained 5.2% over the past month, while ITW has returned 4.5%. Also, ABB’s 24.3% gain year-to-date is significantly higher than ITW’s 16.8% return. Moreover, ABB is the clear winner with a 30.6% gain versus ITW’s 12.2% return over the past year.

But which of these two stocks is a better buy now? Let’s find out.

Latest Developments

On September 30, 2021, ABB is launching an innovative all-in-one Electric Vehicle charger, which provides the fastest charging experience on the market. This could lead to high demand for the product due to rapid electric vehicle adoption worldwide.

On October 28, 2021, E. Scott Santi, ITW’s Chairman, and CEO said, “We remain highly focused on fully leveraging the competitive strength of the ITW Business Model and the investments we have made, and continue to make, in support of the execution of our enterprise strategy and our ‘Win the Recovery’ positioning to their full potential.”

Recent Financial Results

ABB’s revenues increased 7% year-over-year to $7.03 billion for the fiscal third quarter that ended September 30, 2021. The company’s operational EBITA grew 35% year-over-year to $1.06 billion. However, its net income came in at $652 million, representing an 86% year-over-year decrease. Also, its EPS came in at $0.33, down 85% year-over-year.

ITW’s revenues increased 8% year-over-year to $3.56 billion for the fiscal third quarter that ended September 30, 2021. The company’s operating income grew 7.1% year-over-year to $845 million, while its net income came in at $639 million representing a 9.8% year-over-year increase. Also, its EPS came in at $2.02, up 10.4% year-over-year.

Past and Expected Financial Performance

ABB’s EPS grew at a CAGR of 38.4% over the past three years. Analysts expect ABB’s revenue to increase 6.6% for the quarter ending December 31, 2021, and 10.9% in fiscal 2021. The company’s EPS is expected to grow 46.2% for the quarter ending December 31, 2021, and 43.9% in fiscal 2021. Moreover, its EPS is expected to grow at a rate of 14.6% per annum over the next five years.

On the other hand, ITW’s EPS grew at a CAGR of 15.9% over the past three years. The company’s revenue is expected to increase 1.1% for the quarter ending December 31, 2021, and 13.6% in fiscal 2021. Its EPS is expected to decline 6.9% for the quarter ending December 31, 2021, but grow 27.6% in fiscal 2021. ITW’s EPS is expected to grow at a rate of 13.6% per annum over the next five years.

Profitability

ABB’s trailing-12-month revenue is two times what ITW generates. However, ITW is more profitable with a gross profit margin and net income margin of 41.77% and 19.14% compared to ABB’s 32.74% and 6.40%, respectively.

Furthermore, ITW’s ROE, ROA, and ROTC of 88.11%, 14.56%, and 20.45% are higher than ABB’s 13.75%, 5.23%, and 9.03%, respectively.

Valuation

In terms of forward EV/S, ITW is currently trading at 5.54x, 124.3% higher than ABB’s 2.47x. Moreover, ITW’s forward EV/EBITDA ratio of 20.31x is 65.4% higher than ABB’s 12.28x.

So, ABB is relatively affordable here.

POWR Ratings

ABB has an overall grade of A, which equates to a Strong Buy rating in our proprietary POWR Ratings system. On the other hand, ITW has an overall grade of C, which translates to a Neutral rating. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

ABB has a C grade for Sentiment. This is justified as Wall Street analysts expect the stock to hit $36.76 in the near term, which indicates a potential upside of 5.8%. On the other hand, ITW has a D grade for Sentiment, as Wall Street analysts expect the stock to hit $231.20 in the near term, which indicates a potential decline of 2.9%.

In addition, ABB has a B grade for Momentum. This is justified given ABB’s 20.7% return over the past nine months. However, ITW has a C grade for Momentum.

Of the 79 stocks in the Industrial - Machinery industry, ABB is ranked #3. In contrast, ITW is ranked #49.

Beyond what I’ve stated above, we have also graded the stocks for Value, Quality, Stability, and Sentiment. Click here to view all of ABB ratings. Also, get all of ITW ratings here.

The Winner

The industrial machinery sector is expected to grow with increasing construction and infrastructure activities this year and beyond. While both ABB and ITW are expected to gain, it is better to bet on ABB now because of its lower valuation and better growth prospects.

Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Industrial - Machinery industry here.

ITW shares were trading at $232.15 per share on Tuesday afternoon, down $5.96 (-2.50%). Year-to-date, ITW has gained 15.69%, versus a 23.04% rise in the benchmark S&P 500 index during the same period.

Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles.

More...