Illinois Tool Works Inc. (ITW) CEO buys $1 Million, two ratios raise red flags

Insider buying inched higher last week with executives and directors laying out more than $81 million to acquire shares in their companies. One of the more interesting purchases in our view belongs to Illinois Tool Works Inc. (ITW) Chief Executive Officer (CEO) E. Scott Santi.

Prior to last week, Santi has never made a significant purchase of ITW stock. He’s been a straight up seller. Since March 2006, the CEO has unloaded more than 1 million shares and exceeded $108 million in proceeds. (1)

Wow! Sign me up for some of that when he retires.

To be fair, he did buy 11 shares on February 11, 2015 at $98.86 for a total of $1,065. It appears it was stock allocated to his account in the Illinois Tool Works Inc. Savings & Investment Plan. (2)

This time around, the boss didn’t play. Santi opened his bank account and bought almost $1 million of the industrial product manufacture’s stock. Sixty-three-hundred shares at $158.42, to be precise. ITW closed trading at $152.62 on Wednesday, May 13, 2020.

Relative to his history, the standalone buy looks like a flashing neon sign along the road in the pitch-black country night. Let’s examine some of Illinois Tool Works’ recent history for price-to-sales (P/S) and price-to-book (P/B) to see if the CEO went bargain hunting.

For 2021, Wall Street sees consensus revenue of $12.86 billion with a low estimate of $11.48 billion and maxing out at $13.71 billion. (3) In the last five-years, the industrial company traded at an average of 3.25 times revenue, a low of 2.14 and a high of 4.28.

With the P/S history and 2021 sales projections, we can build a potential price range for ITW. First up, the worst-case scenario based on the numbers on hand. Santi would see his shares slide slightly more than half to $77.76 using the low-end sales forecast and five-year low P/S ratio. Using the consensus ’21 number and the average five-year P/S figure delivers a price target of $132.29. Redlining the max price to sales metric and high-end revenue prediction for next year works out to $185.72.

Meatloaf sang not to be “sad because two out of three ain’t bad.” In this case, however, investors will be crying icicles instead of tears.

As of this keystroke, ITW’s trades at 21.29 times its current book value of $7.17. (4) Since 2015, investors have valued Illinois Tool Works from 5.64 to 22.38 times book value and averaged 11.47. Um, yeah, things aren’t looking too good here either as the max P/B ratio times 7.17 equals $160.46. At the bottom, shares would nosedive to $40.44. It would be as U-G-L-Y at the average with a potential price of $84.18.

Based on Illinois Tool Works Inc.’s (ITW) recent price to sales and price to book history, it’s hard to make a case that CEO E. Scott Santi went bargain hunting. Nonetheless, spending nearly $1 million dollars when he’s done nothing but print sell tickets for the last 14-years is eye-catching.

ITW’s stock chart suggests shares could be in near-term trouble if they were to close below $150ish. The next clear level of support is in the neighborhood of $135. Any lower than that, and Illinois Tool Works might revisit its COVID 19 low of $115.

Investors considering following the CEO’s lead might consider being patient and hoping ITW trades lower. Otherwise, we aren’t fans of the current reward to risk profile based on the company’s five-year P/S and P/B ratios.