ITW stock: New dividend king slowly forms a highly bullish pattern

Illinois Tool Works (NYSE: ITW) stock has pulled back in the past few days as investors position themselves for the upcoming earnings report that will provide more color on its business. While growth expectations are low, the stock has formed the rare inverted head-and-shoulders pattern, pointing to a rebound.

Illinois Tool Works is a dividend king with slowing sales growth

Illinois Tool Works is a large American industrial company that makes products used directly and indirectly by millions of people globally. 

It makes automotive products that are used by large companies like General Motors and Ford, construction products like Paslode, Ramset, and Red Head, and food equipment like commercial dishwashers and ovens.

ITW has grown to become a dividend king, a company that has paid and raised its dividends for over 50 years. It now has a dividend yield of 2.43%, a five-year growth of 7.4%, and a payout ratio of 58%.

Illinois Tool Works stock has come under pressure in the past few months as the US-Iran war has led to a surge in key raw material costs. At the peak of this war, the stock dropped from $303 to $241 within weeks.

The next key catalyst for the ITW stock price is the upcoming earnings report, which will provide more color on its business. The report will come out on July 28th this year.

Yahoo Finance data shows that analysts expect the upcoming report will show that its revenue rose by 3.36% in the last quarter to $4.19 billion. Its guidance for the third quarter’s number will be $4.18 billion, up by 3%. Its annual revenue is expected to come in at $16.6 billion from the previous year’s $16 billion.

The most recent results showed that ITW delivered solid numbers, with its revenue rising by 5% in Q1, with its margin rising by 60 basis points to 25.4%. Its earnings per share (EPS) rose by 12% to $2.66.

READ MORE: Illinois Tool Works stock: why Josh Brown says ITW is the 'best' in market

Valuation concerns persist

A key concern now is on its valuation, which is a bit elevated for a slow-growing industrial company. 

Illinois Tool Works trades with a forward price-to-earnings ratio of 23.38, slightly higher than the sector median of 20. The S&P 500 Index has a multiple of 22.

Most notably, ITW now trades with a higher multiple than other faster-growing companies like Micron and Nvidia. Micron, whose revenue is growing by triple digits and has higher margins, trades with a forward multiple of 13, while Nvidia has a multiple of 21.

As such, the company will need to report stronger revenue and profits to convince investors.  This explains why analysts are not highly excited about the company, with most of them having hold or underweight ratings.

ITW stock price technical analysis

Illinois Tool Works stock chart | Source: TradingView

The daily chart shows that the Illinois Tool Works stock remains under pressure today. However, a closer look shows that it is in the process of forming an inverted head-and-shoulders pattern. It has already completed the formation of the left shoulder and head sections and is now in the right one.

This pattern suggests that it may need to rereat to the right shoulder section of $255 and then bounce back. In the future, the stock may jump to $303, its highest level in February this year.