Two Industrial Giants Poised for Exceptional Growth

Key Points

• Illinois Tool Works’ diverse business model is not a burden; rather, it strategically avoids complexity by decentralizing operations.

• CarMax, a leading used‑car retailer, may finally be emerging from a prolonged period of difficulty.

Contrary to common perception, industrial stocks are often linked to economic cycles, yet certain companies can still deliver outsized returns when they align with emerging trends.

Image source: Getty Images.

Illinois Tool Works

Contrary to its name, Illinois Tool Works (NYSE: ITW) produces far more than conventional tools; its portfolio includes restaurant‑grade dishwashers, industrial testing equipment, welding supplies, plastic packaging, and automotive components, each managed as a separate business unit.

Its streamlined, decentralized structure empowers grassroots innovation, enabling Illinois Tool Works to consistently outperform peers. In the first quarter, revenue rose 5% year‑over‑year, with over 25% of earnings converted into operating profit, even amid inflationary pressures. Analysts anticipate comparable performance in the upcoming fiscal quarter.

The primary catalyst for its market‑leading growth is a robust dividend program coupled with ongoing share repurchases. As a Dividend King with more than 50 consecutive years of dividend increases, the company has raised its per‑share payout for 63 straight years and, over the past decade, increased dividends by slightly over 10% annually, driven largely by the repurchase of nearly 10% of its shares in the last five years.

The outcome is strong total returns, largely fueled by reinvested dividends rather than pure price appreciation, though price appreciation still occurs.

Currently, the stock offers a forward dividend yield of approximately 2.3%, providing an attractive cash return if investors choose to allocate the distributions elsewhere.

CarMax

Although its performance is tied to consumer financial health, CarMax (NYSE: KMX) is classified within the industrial sector.

The stock has struggled recently; after peaking during the COVID‑19 pandemic, it has declined by more than 60%, reaching a multi‑year low in December.

Competition from online used‑car platforms such as Carvana, the rise of ride‑hailing services like Uber and Lyft, and the increasing unaffordability of used vehicles—averaging over $27,000 according to Kelley Blue Book—have all contributed to the slowdown.

Nevertheless, consumers may also be under pressure; the Federal Reserve reports that 90‑day auto‑loan delinquencies remain at 3%, a level last observed during the post‑2008 subprime mortgage recession, which poses concerns for CarMax and its investors.

Consequently, the industry’s primary challenge is not weak demand but rather constrained inventory.

That situation is expected to improve; Cox notes that used‑car inventories have been rising modestly, increasing from March’s multiyear low to about 47 days of supply as of last month—a modest but promising start.

Moreover, with the average vehicle age in the U.S. at 12.8 years and new‑car prices exceeding $49,758, many consumers may find themselves gravitating toward used‑car retailers like CarMax in the near term.

The stock has risen more than 40% year‑to‑date, with a 19% gain in the most recent month, suggesting a potential inflection point in its trajectory.

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