Industrial Select Sector

S&P 500

The Balanced Allocator

Comparable Companies - ITW

The insider trading record shows 2 purchases and 14 sales in the past 12 months. The latest short interest is 3.4% of float with a days‑to‑cover of 4.2. Primary institutional holders include Vanguard Group Inc., Briar Hall Management LLC, BlackRock Inc., State Farm Mutual Automobile Insurance Co., and State Street Corp.

DIRECTOR

SVP & CHIEF HR OFFICER

EXECUTIVE VICE PRESIDENT

VP & CHIEF ACCOUNTING OFFICER

PRESIDENT & CEO

SVP & CFO

Item 4 reports ownership of 25,850,978 shares of common stock, representing 8.91% of the class.

Succeeded E. Scott Santi as CEO following a multi-year succession plan.

President and Chief Executive Officer

Continues in role as CFO since joining in 2013.

Senior Vice President and Chief Financial Officer

Transitioned from CEO to Non-Executive Chairman.

Non-Executive Chairman

Lead Independent Director

Promoted to EVP of Automotive OEM segment.

Executive Vice President, Automotive OEM

Executive Vice President, Welding

Elected EVP of Polymers & Fluids segment.

Executive Vice President, Polymers & Fluids

Vice President and Chief Accounting Officer

Christopher A. O'Herlihy

Michael M. Larsen

E. Scott Santi

Richard H. Lenny

Christopher O'Herlihy is a 34-year ITW veteran whose 'provenance' is defined by his mastery of the ITW Business Model. His tenure as EVP of Food Equipment and Vice Chairman provided the operational foundation for his 2024 elevation to CEO. In his first year, he delivered record EPS and operating margins, demonstrating a seamless transition from the Santi era. His leadership style is characterized by a focus on 'Customer-Back Innovation' and disciplined capital allocation, maintaining ITW's status as a best-in-class industrial performer.

Michael Larsen brings a rare combination of CEO-level operational experience and CFO-level financial discipline. His tenure at Gardner Denver was marked by record-breaking financial performance and a high-value exit for shareholders via a private equity buyout. Since joining ITW in 2013, he has been a key architect of the company's margin expansion and capital return strategy, leveraging his prior experience in global industrial manufacturing to sustain ITW's financial strength.

E. Scott Santi's legacy at ITW is one of profound structural transformation. By aggressively divesting low-margin commodity businesses and refocusing the enterprise on its core 80/20 business model, he tripled the company's market capitalization and delivered superior shareholder returns. His transition to Non-Executive Chairman ensures that his strategic 'provenance' and deep institutional knowledge continue to guide the board during the next phase of ITW's growth.

Richard Lenny's career is defined by his role as a change agent in established corporate cultures. As the first outsider CEO of Hershey, he navigated complex governance challenges and implemented difficult restructuring measures to modernize the company. His experience managing a controlling shareholder (the Hershey Trust) and leading through significant operational pivots provides him with a unique perspective as ITW's Lead Independent Director, particularly in matters of governance and long-term value creation.

Daniel J. Brutto

Susan Crown

Darrell L. Ford

Kelly J. Grier

James W. Griffith

Jay L. Henderson

Jaime Irick

David B. Smith, Jr.

Pamela B. Strobel

Emerson Electric Co. is a diversified industrial company operating through four segments: Final Control, Measurement & Analytical, Discrete Automation, and Safety & Productivity. It provides products and services for process and hybrid industries.

control valves, isolation valves, shutoff valves, pressure relief valves, actuators, and regulators

intelligent instrumentation measuring physical properties of liquids or gases

solenoid valves, pneumatic valves, valve position indicators, pneumatic cylinders, actuators, air preparation equipment, pressure and temperature switches, electric linear motion solutions, programmable automation control systems and software, electrical distribution equipment, and materials joining solutions

tools for professionals and homeowners that support infrastructure, promote safety and enhance productivity

Parker-Hannifin is a motion and control technologies company with a diversified portfolio serving six market verticals. It is known for innovation, engineering, and customer service.

Dover is a diversified industrial company with five segments: Engineered Products, Clean Energy & Fueling, Imaging & Identification, Pumps & Process Solutions, and Climate & Sustainability Technologies.

As of December 31, 2025 the Company operated approximately 410 plants and office facilities worldwide, of which roughly 270 are located outside the United States. Principal foreign locations include China, Germany, France and the United Kingdom. Net plant and equipment consists of $199 million of land, $1,705 million of buildings and improvements, $4,389 million of machinery and equipment, and $299 million of construction in progress. The Company also reports $294 million of operating-lease right-of-use assets.

Illinois Tool Works exhibits cash-rich but earnings-fragile performance with 0.9% revenue growth to $16.0B, operating margin decline to 26.3%, and FCF at $2.7B (102% to net income) amid negative incremental ROIC of -30.8% and rising Debt/Equity to 278%; the management team under CEO O'Herlihy (tenure since 2024) delivers adequate stewardship via strong LTI alignment to ROIC/EPS and robust shareholder returns (21.1% net yield), offset by mediocre buyback timing and modest external CEO track record, making this team a solid but not exceptional match for compounding per-share value in a Mature Compounder archetype.

The Company faces risks from environmental regulations and compliance, including potential costs and adverse rulings from legal proceedings related to environmental matters. It believes its operations are in substantial compliance with applicable environmental laws, but changes in regulations or physical risks of climate change could negatively impact its business, capital expenditures, results of operations, and financial condition.

As of December 31, 2025, the Company employed approximately 43,000 people, with about 16,000 located in the United States and the remainder in multiple other countries. Less than three percent of U.S. employees are represented by a labor union.

No specific disclosures regarding product quality, safety, privacy, or responsible use were made in the annual filing.

No specific supply chain or community disclosures were made in the annual filing.

Revenue grew only 0.9% YoY to $16.0 bn in FY2025, driven almost entirely by a 1% foreign‑currency boost, while operating margin slipped 50 bps to 26.3% and net margin fell 280 bps to 19.1%.

The FY2025 Q4 and Q2 calls described a $800 million internal‑investment budget for 2025 focused on high‑return organic growth projects, productivity enhancements and capacity expansions for emerging segments such as EV‑related automotive components. The 10‑K notes that CapEx is primarily for capacity expansion and that the company adds production capacity as demand increases, with no major plant closures disclosed.

The 10‑K disclosed no material impairments or asset write‑downs in FY2025, and the auditor’s critical audit matters list only income‑tax judgments, indicating that the balance sheet was not flagged for impairment risk. The Innovation dossier confirms that no plant closures or capacity reductions were reported, and that existing capacity remains under‑utilized, suggesting that the rise in PP&E and intangibles reflects ongoing investment rather than replacement of obsolete assets.

Management described $800 million of 2025 internal growth projects and $408 million of CapEx as investments to sustain high‑margin CBI initiatives. The Innovation dossier notes no specific new capacity additions, and the capital allocation appendix shows a negative incremental ROIC, suggesting that the recent projects have not yet generated returns above the weighted average cost of capital.

Briar Hall Management LLC

P/FCF

Axel R.J. Beck

Executive Vice President

Mary K. Lawler

Senior Vice President and Chief Human Resources Officer

T. Kenneth Escoe

Axel R. J. Beck

Carbonell Javier Gracia

Szafranski Sharon

Randall J. Scheuneman

Mark A. Thibeault

To elect the twelve director nominees named in the proxy statement

Election of directors

To hold an advisory vote to approve executive compensation

Advisory vote to approve executive compensation

To ratify the appointment of Deloitte & Touche LLP as ITW's independent registered public accounting firm for 2025

Ratification of appointment of independent registered public accounting firm

To consider a non-binding stockholder proposal for shareholder ratification of termination pay

Non-binding stockholder proposal for ratification of termination pay

Independent Lead Director

President & Chief Executive Officer

Executive Vice President for Policy and Legal Affairs and General Counsel of Mutual Fund Directors Forum

Retired Executive Vice President and Chief Administrative Officer of Exelon Corporation and President of Exelon Business Services Company

Illinois Tool Works Inc. (ITW) is a global manufacturer of a diversified range of industrial products and equipment. The Company operates 88 divisions in 49 countries and reports its results through seven operating segments: Automotive OEM, Food Equipment, Test & Measurement and Electronics, Welding, Polymers & Fluids, Construction Products, and Specialty Products.

Global niche supplier to top-tier automotive OEMs and tier-1 suppliers, providing plastic and metal components, fasteners and assemblies for vehicles.

Branded industry leader in commercial food-service equipment, offering warewashing, cooking, refrigeration, food-processing equipment and related services.

Producer of test and measurement equipment, consumables and software, as well as electronic assembly equipment and components for diverse end-markets.

Manufacturer of arc welding equipment, consumables and accessories serving general industrial, shipbuilding, construction and automotive markets.

Supplier of engineered adhesives, sealants, lubrication and cutting fluids, and polymer products for automotive aftermarket, industrial and MRO markets.

Provider of engineered fastening systems, tools and hardware for residential, commercial and renovation construction markets.

Diversified niche segment with patented beverage-packaging equipment, product-coding and marking systems, and appliance components.

Held WACC 10.2% and base terminal multiple 20.0x constant, solved for Year 5 margin to justify current price of 286.9.

Balance Sheet - Supplemental

Balance Sheet

Cash Flow Statement - Supplemental

Cash Flow Statement

Income Statement - Supplemental

Income Statement

Ratios

Valuation

Historical Ratios & Multiples - ITW

The industry is in a Golden Age capital cycle where revenue growth (2.8%-10.3% for peers) outpaces capex intensity (1.7%-3.1%). However, Illinois Tool Works is underperforming this context with only 0.9% revenue growth, suggesting it is not fully capturing the secular tailwinds in automation and electrification.

Illinois Tool Works is relevant for analysis at this moment following its Q4 2025 earnings beat and the initiation of 2026 guidance, which tests the credibility of its margin expansion narrative against a backdrop of stagnant organic demand.

Acceleration of Customer-Backed Innovation (CBI) contribution. CBI reached 2.4% of revenue in 2025 and is trending toward a 3%+ goal by 2030. A sequential increase in this metric would validate the organic growth engine and address market concerns regarding stagnant demand.

Execution of the 1.5B share repurchase program. The board authorized this program for 2026, which is expected to reduce the share count by approximately 2% and support EPS growth despite flat organic revenue.

Moat erosion from low-cost competitors. If competitors successfully disrupt the Welding or Food Equipment segments with lower-priced alternatives, Illinois Tool Works' pricing power and 44.1% gross margins would be impaired.

Sustained labor cost inflation. Higher employee-related costs and the reversal of LIFO benefits could continue to neutralize the gains from enterprise initiatives, leading to further margin contraction.

Management alignment is strong, as insiders currently hold significant stakes (CEO holds 342,489 shares), and the board's LTI is tied to ROIC and Operating Margin. However, the $79.8M in net insider selling over the past 12 months suggests a cautious internal outlook on the current valuation, and the 278% Debt/Equity ratio warrants ongoing monitoring.

Liquidation value analysis is not relevant for the company's archetype ('Mature_Compounder') and was not performed.

ITW reports Q4 and full year 2025 results with solid performance and initiates 2026 guidance

ITW reports Q4 and full year 2021 results with strong revenue and margin growth

Illinois Tool Works price target raised to $275 from $244 at Barclays

Illinois Tool Works price target raised to $270 from $250 at Wells Fargo

Illinois Tool Works price target raised to $253 from $230 at Goldman Sachs

Illinois Tool Works price target raised to $298 from $283 at Truist

Illinois Tool Works downgraded to Sell from Neutral at Goldman Sachs

Illinois Tool Works price target lowered to $245 from $250 at Wells Fargo

Situation: Current price is $285.98 versus fair value $258.1 (-9.7% expected return), and valuation confidence is stable. Debate: Bull case depends on Acceleration of Customer-Backed Innovation (CBI) contribution. Bear case centers on Moat erosion from low-cost competitors. Conclusion: Recommendation is Unclear; maintain no position until reliability and catalyst evidence improve.

Executive Summary

Illinois Tool Works is a high-quality industrial compounder leveraging its proprietary 80/20 process to maintain best-in-class margins. While organic growth is currently stagnant at 0.9%, the company's widening moat and disciplined capital return profile, including a 21.1% net yield over 4.8 years, provide a robust foundation for long-term value creation.<ul><li>Driver: The primary value driver is the continued execution of the 80/20 business model and the acceleration of Customer-Backed Innovation (CBI).</li><li>Catalyst: The specific event that unlocks value is the CBI revenue contribution reaching its 3% target by 2030, coupled with the execution of the $1.5B share repurchase program.</li><li>Protection: Downside protection is provided by a widening moat built on 14,600 patents and high switching costs in the Welding and Food Equipment segments.</li></ul>Our variant perception acknowledges the durability of the 80/20 model but suggests the market is currently overestimating the near-term margin expansion potential. While management targets 100 bps of annual expansion, our analysis of the 180 bps headwind from labor and LIFO reversals in FY2025 suggests a more muted trajectory, making the current 26.9x P/E multiple vulnerable to a de-rating.This is a long-term, buy-and-hold investment predicated on the continued execution of a proven business model and the compounding of per-share intrinsic value.

Core Investment Rationale

Illinois Tool Works operates a decentralized model across seven segments, utilizing the 80/20 front-to-back process to focus on the most profitable customers and products. Revenue is diversified across Automotive OEM, Food Equipment, and Welding, with a strategy centered on Customer-Back Innovation (CBI) to drive above-market organic growth. The company maintains a produce-where-we-sell model, with 90% of products manufactured in the regions where they are sold, mitigating tariff and supply chain risks.Core assets include a portfolio of 14,600 unexpired patents and iconic brands like Miller (Welding), Hobart (Food Equipment), and Rain-X (Polymers & Fluids). The company's asset base is focused on these strategic intangibles and proprietary technologies that form a widening moat through high switching costs and system-of-record status. Physical assets include approximately 410 plants and office facilities worldwide, with production capacity generally exceeding operating levels to allow for flexible scaling.The landscape is a rational oligopoly including Emerson Electric, Parker-Hannifin, and Eaton. Illinois Tool Works maintains a gross margin premium of 5.4 percentage points over the peer median (44.1% vs 38.7%), indicating superior pricing power and structural cost advantages. Competition is primarily focused on innovation through digital technologies and advanced engineering to capture secular trends in automation and electrification.The current situation is defined by the 2024 leadership transition to Christopher O'Herlihy and a pivot toward Customer-Back Innovation (CBI) as the primary growth engine. While the company has a history of stable, high-return performance-evidenced by a 21.8% ROIC-it is currently navigating a period of flat organic growth (0.9% in FY2025) and rising leverage (278% Debt/Equity). This transition follows the Santi era, during which the company divested $5B of commodity-related revenue to focus on higher-margin organic growth, tripling its market capitalization from $23B to $78B.

Business & Situation

<ul><li>Bull Case: 1. Widening moat driven by CBI reaching a 3%+ revenue contribution. 2. Disciplined 80/20 execution delivering 100 bps of annual margin expansion. 3. Robust capital return profile with a 21.1% net yield over 4.8 years.</li><li>Bear Case: 1. Stagnant organic revenue growth (0.9%) masking underlying demand weakness. 2. Negative incremental ROIC (-30.8%) suggesting value-destructive reinvestment. 3. High valuation (26.9x P/E) relative to a 182.51 bear-case floor.</li></ul>The consensus view is that Illinois Tool Works is a safe haven industrial compounder capable of expanding margins indefinitely through its 80/20 process, regardless of the macro environment. This narrative drives the current premium valuation of 26.9x earnings, which is 7.9% above its 5-year average.The industry is in a Golden Age capital cycle where revenue growth (2.8%-10.3% for peers) outpaces capex intensity (1.7%-3.1%). However, Illinois Tool Works is underperforming this context with only 0.9% revenue growth, suggesting it is not fully capturing the secular tailwinds in automation and electrification.Our differentiated view is that the market is underappreciating the impact of the 180 bps headwind from labor and LIFO reversals, which more than offset the 130 bps in gains from enterprise initiatives in FY2025. While management guides for 100 bps of annual margin expansion, the negative incremental ROIC of -30.8% suggests that recent capital deployments are not yet yielding the expected compounding benefits. The current price fully reflects the durability of the moat but leaves no margin of safety for the 278% debt-to-equity leverage.While the business model is exceptional, the current price discounts a level of growth and margin expansion that is not supported by the recent 180 bps labor/LIFO headwind or the flat organic sales. We conclude that the stock is a high-quality asset at an unattractive price.Our analytical edge comes from a deeper appreciation of the company's intangible assets and switching costs, specifically the 14,600 patents that form a structural barrier to entry. However, our edge also identifies a disconnect between management's above-market growth narrative and the hard data showing flat organic revenue and negative incremental reinvestment returns.

Core Thesis

CEO Christopher O'Herlihy is a 34-year veteran who succeeded E. Scott Santi in 2024. During his tenure as Vice Chairman, he oversaw a period where operating margins rose from 15.9% to 26.8%. In his first year as CEO, he delivered record EPS and operating margins, though organic growth remained flat at 0.9%.Capital allocation is adequate, with $7.0B in buybacks and $8.1B in dividends over 4.8 years. However, buyback timing has been mixed, with purchases occurring at 15.7x to 20.3x EBITDA multiples, and the negative incremental ROIC of -30.8% signals a lack of opportunistic reinvestment.Management maintains high credibility, hitting 80% of revenue and EPS forecasts over the last 5 years. However, the narrative of above-market organic growth is currently at odds with the flat organic performance recorded in FY2025.<ul><li>Board Independence: 92% (11 of 12 directors)</li><li>Chairman/CEO Roles: Separate</li><li>Chairman Tenure: 14 years</li><li>Insider Ownership: 0.15%</li><li>Shareholder Rights: Declassified Board, Plurality Voting</li></ul>Management alignment is strong, as insiders currently hold significant stakes (CEO holds 342,489 shares), and the board's LTI is tied to ROIC and Operating Margin. However, the $79.8M in net insider selling over the past 12 months suggests a cautious internal outlook on the current valuation, and the 278% Debt/Equity ratio warrants ongoing monitoring.

Leadership & Governance

The valuation floor is anchored to the Bear Case DCF value of 182.51, which models a permanent erosion of the company's moat and margin compression to 24.5% by Year 5.The base case assumes 2.6% revenue growth and 26.3% operating margins, reflecting balanced execution risk and high guidance hit rates of 80% revenue/EPS.The bull case assumes CBI acceleration to 3%+ revenue contribution and margin expansion to 28.2% by Year 5. Blue-Sky Potential: 295.95.The Bear Case is defined by a scenario of moat erosion and declining profitability. The final Bear Case value is therefore determined directly by the Bear Case DCF scenario value of 182.51.

Valuation Context

<ul><li>Acceleration of Customer-Backed Innovation (CBI) contribution. CBI reached 2.4% of revenue in 2025 and is trending toward a 3%+ goal by 2030. A sequential increase in this metric would validate the organic growth engine and address market concerns regarding stagnant demand.</li><li>Execution of the 1.5B share repurchase program. The board authorized this program for 2026, which is expected to reduce the share count by approximately 2% and support EPS growth despite flat organic revenue.</li><li>Illinois Tool Works is relevant for analysis at this moment following its Q4 2025 earnings beat and the initiation of 2026 guidance, which tests the credibility of its margin expansion narrative against a backdrop of stagnant organic demand.</li></ul>Illinois Tool Works is relevant for analysis at this moment following its Q4 2025 earnings beat and the initiation of 2026 guidance, which tests the credibility of its margin expansion narrative against a backdrop of stagnant organic demand.

Catalyst Path & Context

<ul><li>Moat erosion from low-cost competitors. If competitors successfully disrupt the Welding or Food Equipment segments with lower-priced alternatives, Illinois Tool Works' pricing power and 44.1% gross margins would be impaired. Peer gross margins average 38.7%, creating a significant price umbrella for competitors to target.</li><li>Sustained labor cost inflation. Higher employee-related costs and the reversal of LIFO benefits could continue to neutralize the gains from enterprise initiatives, leading to further margin contraction. Labor and LIFO reversals created a 180 bps headwind in FY2025, more than offsetting the 130 bps initiative gain.</li><li>Management alignment is strong, as insiders currently hold significant stakes (CEO holds 342,489 shares), and the board's LTI is tied to ROIC and Operating Margin. However, the $79.8M in net insider selling over the past 12 months suggests a cautious internal outlook on the current valuation, and the 278% Debt/Equity ratio warrants ongoing monitoring. Risk monitor: Current price $285.98 vs fair value $258.1, expected return -9.7%.</li></ul>

Primary Risks

<ul><li>Entry Target: Calculated threshold price required to restore a 30% expected return based on internal valuation.</li><li>Stop Loss: Stop-loss is set as a thesis-risk tripwire for position risk management.</li><li>Position Size: Final size 'Starter' reflects Medium conviction adjusted for the Mature_Compounder structural cap and valuation reliability.</li><li>Time Horizon: Time horizon aligns with catalyst realization timeline and archetype cycle length.</li></ul><ul><li>Management's commentary indicates CBI patent filings increased 9% in 2025, serving as a leading indicator for future revenue growth.</li><li>The company has a consistent history of capital returns, with $7.0B in buybacks over the last 4.8 years.</li><li>Peer gross margins average 38.7%, creating a significant price umbrella for competitors to target.</li></ul>The killer is a fundamental, permanent impairment of the moat, such as a disruptive new technology from a competitor that takes permanent market share in the Welding or Food Equipment segments, or a sustained inability to pass through labor cost increases. Also require valuation reliability to improve before re-entering.

Actionable Parameters & Monitoring

ITW offers moderate upside (fair value $258.1 vs current $285.98, expected return -9.7%) and a floor near $182.51. Recommendation: Hold for better entry or stronger conviction.

Final Conclusion

The primary value driver is the continued execution of the 80/20 business model and the acceleration of Customer-Backed Innovation (CBI).

Driver

The specific event that unlocks value is the CBI revenue contribution reaching its 3% target by 2030, coupled with the execution of the $1.5B share repurchase program.

Catalyst

Downside protection is provided by a widening moat built on 14,600 patents and high switching costs in the Welding and Food Equipment segments.

Protection

1. Widening moat driven by CBI reaching a 3%+ revenue contribution. 2. Disciplined 80/20 execution delivering 100 bps of annual margin expansion. 3. Robust capital return profile with a 21.1% net yield over 4.8 years.

Bull Case

1. Stagnant organic revenue growth (0.9%) masking underlying demand weakness. 2. Negative incremental ROIC (-30.8%) suggesting value-destructive reinvestment. 3. High valuation (26.9x P/E) relative to a 182.51 bear-case floor.

Bear Case

Situation: Current price is $285.98 versus fair value $258.1 (-9.7% expected return), and valuation confidence is stable. Debate: Bull case depends on Acceleration of Customer-Backed Innovation (CBI) contribution. Bear case centers on Moat erosion from low-cost competitors. Conclusion: Recommendation is Unclear; maintain no position until reliability and catalyst evidence improve.

The strategy evolved from a heavy focus on portfolio pruning via Product Line Simplification (PLS) as a primary growth and margin tool to a balanced dual-engine model where PLS is a maintenance activity and Customer-Backed Innovation (CBI) is the primary driver for above-market organic growth and margin expansion.

Method	Implied Value	Weight	Weighted Value
DCF	$242.25	50%	$121.13
Comps	$307.32	30%	$92.20
Historicals	$223.90	20%	$44.78
Total Weighted			$258.10

ITW

Company Overview

Price History