Illinois Tool Works Inc.ITWNYSE

Overview Intelligence Charts News Fundamentals Key Metrics TTM Financials Earnings Growth Rating Analysts Institutional Peers Historical

DCF Valuation

DCF Valuation Summary

Sell

Fair Value: $220.87 per share(market-calibrated)

-24.1%

Upside to Fair Value

Current

$291.17

Pure Model

$212.62

Fair Value

$220.87

Bull Case

$253.32

Bear Case

$173.50

Market Reality Check

Model Terminal Growth

2.25%

Market-Implied Growth

5.63%

Calibrated Growth

3.09%

Fair value uses 75% model / 25% market-implied terminal growth. Pure model: $212.62.

What's Driving This Ratingfor ITW

✓

CapEx already efficient

CapEx at 2.52% of revenue is already at or below sector maintenance level. No normalization needed — cash conversion is already strong.

✓

Premium margins already priced in

EBIT margin of 30.65% is already well above sector average. The model holds this level — there's limited room for margin expansion to drive upside. Valuation depends primarily on revenue growth.

→

Moderate revenue growth

Analyst consensus projects 3.26% revenue growth, fading to 2.25% by Year 10. Revenue reaches $21.1B (vs $16.0B today).

↔

Perpetuity and exit methods disagree

Perpetuity growth gives $175.54/share (15.2x terminal FCF) while exit multiple gives $249.71/share (25.6x terminal FCF). The 18x EV/EBITDA exit reflects current market multiples, while the perpetuity method with 2.25% growth is more conservative. The base case averages both methods.

🎯

Market pricing in higher long-term growth

To justify $291.17, the market implies 5.63% perpetual growth — 338bps above the model's 2.25%. This suggests the market sees additional growth catalysts (AI, new products, market expansion) not captured in analyst estimates.

✓

Strong cash flow conversion

Year 10 FCF/EBITDA conversion of 70.42% indicates efficient cash generation. FCF reaches $4.9B by Year 10 (23.35% FCF margin).

Weighted Average Cost of Capital (WACC)

Cost of Equity (CAPM)

Risk-Free Rate (Rf)4.50%

Beta (β)1.16

Market Risk Premium4.50%

*Using current implied premium (4.5% per Damodaran 2026), not historical (6.5%)

Cost of Equity (Re)9.72%

Cost of Debt

Pre-tax Cost of Debt2.78%

Tax Rate22.69%

After-tax Cost of Debt2.15%

Equity Weight (E/V)90.47%

Debt Weight (D/V)9.53%

WACC Calculation

WACC = (E/V × Re) + (D/V × Rd × (1-Tc))

WACC = (90.47% × 9.72%) + (9.53% × 2.15%)

= 8.99%

10-Year Free Cash Flow Projections(showing years 1, 3, 5, 7, 10)

Year	Year 1	Year 3	Year 5	Year 7	Year 10
Revenue	$16.6B	$17.7B	$18.9B	$19.8B	$21.1B
EBIT	$5.1B	$5.4B	$5.8B	$6.1B	$6.5B
Tax	$1.2B	$1.2B	$1.3B	$1.4B	$1.5B
NOPAT	$3.9B	$4.2B	$4.5B	$4.7B	$5.0B
+ Depreciation	$416M	$444M	$474M	$496M	$530M
- Capex	$417M	$446M	$476M	$497M	$532M
- Δ NWC	$80M	$86M	$64M	$67M	$71M
Free Cash Flow	$3.8B	$4.1B	$4.4B	$4.6B	$4.9B
Discount Factor	0.917	0.772	0.650	0.547	0.423
Present Value	$3.5B	$3.2B	$2.9B	$2.5B	$2.1B

FCF Formula: Free Cash Flow = NOPAT + Depreciation - Capex - Change in Net Working Capital

Terminal Value Calculation

Perpetuity Growth Method

Year 10 FCF$4.9B

Terminal Growth Rate2.25%

WACC8.99%

TV = FCF₁₀ × (1+g) / (WACC-g)

Terminal Value$74.8B

PV of Terminal Value$31.6B

Exit Multiple Method

Year 10 EBITDA$7.0B

Exit Multiple (EV/EBITDA)18.0x

TV = EBITDA₁₀ × Exit Multiple

Terminal Value$126.1B

PV of Terminal Value$53.3B

Valuation Summary

Perpetuity Growth Method

PV of Projected FCFs$27.8B

PV of Terminal Value$31.6B

Enterprise Value$59.4B

(-) Net Debt$8.1B

Equity Value$51.3B

Shares Outstanding292M

Price per Share$175.54

Exit Multiple Method

PV of Projected FCFs$27.8B

PV of Terminal Value$53.3B

Enterprise Value$81.1B

(-) Net Debt$8.1B

Equity Value$73.0B

Shares Outstanding292M

Price per Share$249.71

Pure Model Fair Value

$212.62

Average of perpetuity growth and exit multiple methods (before market calibration)

Sensitivity AnalysisPrice per Share

WACC ↓ / Growth →	1.25%	1.75%	2.25%	2.75%	3.25%
6.99%	$262.17	$269.79	$279.02	$290.42	$304.87
7.99%	$230.61	$235.62	$241.51	$248.52	$257.00
8.99%	$205.18	$208.64	$212.62	$217.24	$222.65
9.99%	$184.05	$186.53	$189.34	$192.53	$196.19
10.99%	$166.10	$167.93	$169.97	$172.26	$174.85

How to read: This table shows how the valuation changes with different WACC (discount rate) and terminal growth rate assumptions. Green = undervalued, Red = overvalued.

Scenario Analysis

Bear Case

$173.50

-40.4% vs current

• -25% vs analyst consensus
• Terminal growth: 2.0%
• Beta: 1.45

Base Case

$212.62

-27.0% vs current

• Analyst consensus
• Terminal growth: 2.3%
• Beta: 1.16

Bull Case

$253.32

-13.0% vs current

• +25% vs analyst consensus
• Terminal growth: 2.8%
• Beta: 0.99

Key Assumptions & Drivers• Industrials Sector

Growth Assumptions (Select Years)

Year 1 Revenue Growth3.26%

Year 3 Revenue Growth3.29%

Year 5 Revenue Growth2.25%

Year 7 Revenue Growth2.25%

Year 10 Revenue Growth2.25%

Terminal Growth Rate2.25%

Margin & Efficiency

Current EBIT Margin30.65%

Tax Rate22.69%

Historical Capex / Rev2.52%

NWC / Revenue15.33%

Key Drivers: Revenue growth, operating margin expansion, capex efficiency, and working capital management are the primary drivers of cash flow generation. Terminal value assumptions significantly impact final valuation.

Institutional-Grade Methodology

Actual Company Data: Revenue, EBIT, Capex, NWC, Tax Rate, Interest Expense, Beta

Market Assumptions: Risk-free: 4.5% (10Y), MRP: 4.5% (Damodaran 2026), Exit: 18x EV/EBITDA (Industrials sector)

This DCF model is for informational purposes only. Projections are based on assumptions that may not materialize. Past performance does not guarantee future results. Consult a financial advisor before making investment decisions.

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