Using the Earnings Power Value framework with a WACC of 8.5% and normalized earnings of $3.2B, Illinois Tool Works Inc. has a fair value of $101.07 per share. The EPV range is $81.71 – $128.76 based on WACC sensitivity (7.0% – 10.0%).
| Low | Selected | High | |
|---|---|---|---|
| Normalized Earnings | 3,194 | 3,194 | 3,194 |
| (/) WACC | 10.0% | 8.5% | 7.0% |
| Enterprise Value | 32,002 | 37,661 | 45,754 |
| (-) Net debt | 8,118 | 8,118 | 8,118 |
| Equity Value | 23,884 | 29,543 | 37,636 |
| (/) Outstanding shares | 292 | 292 | 292 |
| Fair Price | $81.71 | $101.07 | $128.76 |
Earnings Power Value (EPV) estimates what a company is worth based on its current normalized earnings, assuming zero growth. It values the business as a perpetuity: Normalized Earnings / WACC. This gives a conservative floor value — the company's worth if it never grows but maintains its current profitability.
The model normalizes earnings by: (1) using sustainable gross margins (5-year average) applied to current revenue, (2) deducting maintenance-level operating expenses (average R&D + SG&A as % of revenue), (3) applying the average effective tax rate, and (4) subtracting the average excess of CapEx over D&A (net reinvestment needed to maintain current capacity).
EPV is most useful as a comparison anchor: if the market price is below EPV, the stock may be undervalued even without any growth. If market price exceeds EPV, the premium reflects growth expectations — which may or may not materialize.