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Shares in industrial conglomerate Illinois Tool Works (ITW -0.95%) were down 1.7% by midday today. The move comes as a disappointing earnings report from used car dealer CarMax hit the auto sector.
In a nutshell, CarMax reported slumping sales and reduced its purchases of vehicles accordingly. That’s bad news for the used car industry, and it’s also bad news for new car manufacturers, as falling used car prices will pressure new car sales.
Now I know what you are thinking. What does this have to do with Illinois Tool Works? Along with its peer 3M (a stock also falling today), Illinois Tool Works is known as an industrial stock with heavy exposure to the auto industry. Automotive original equipment manufacturer (OEM) sales made up 19% of the company’s sales in 2021, and its polymers and fluids (13%) segment also have heavy exposure to the automotive aftermarket.
Rightly or wrongly, the market does sell off stocks like Illinois Tool Works and 3M when the auto market catches a cold. That said, there’s much more to the company than its auto exposure. In addition, an improvement in the chip shortage situation means automakers are hoping to increase production in 2023.
Moreover, back in October, Illinois Tool Works’ CFO outlined his expectation that “the automotive OEM segment is well positioned to be a very meaningful contributor to the overall organic growth rate of the enterprise for an extended period of time.”
So, while the knee-jerk reaction is understandable, it’s far from clear that OEM suppliers will suffer, as the auto industry still needs to ramp up production from depressed levels.
Lee Samaha has no position in any of the stocks mentioned. The Motley Fool recommends 3m. The Motley Fool has a disclosure policy.
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