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On Dec 2, we maintained our Neutral recommendation on Lincoln Electric Holdings Inc. (LECO - Analyst Report). While the company should benefit from its acquisition strategy and introduction of new products, challenges remain in the form of economic uncertainty and continuing softness in the construction and related machinery markets.

Why the Reiteration?

Lincoln Electric, on Oct 31, reported third-quarter 2013 adjusted earnings of 86 cents per share, up 8% year over year. The results also beat the Zacks Consensus Estimate of 84 cents. Despite a fall in revenues, continued focus on cost reduction and initiatives to enhance profitability drove the results.

Total revenue dropped 1% year over year to $692 million, missing the Zacks Consensus Estimate of $705 million.

Gross margin expanded 300 basis points (bps) year over year to 33.6% in the quarter aided by better sales mix, an improved price cost relationship and operational improvements. Adjusted operating margin inflated 150 bps to a record 14.7%.

In November, Lincoln Electric announced the acquisition of an ownership interest in Burlington Automation Corporation and entered into a definitive agreement to acquire Robolution GmbH. These acquisitions will help the company enhance its product portfolio in many key high-growth areas.

In addition, Lincoln Electric has maintained its product leadership by investing heavily. Its steady pipeline of products is a key contributor to its Vision 2020 goals of at least 10% compound annual growth and 15% return on invested capital over the 10-year period starting 2011. The company has completed two years of the plan and is well ahead of the run rate required to achieve the goals.

However, Lincoln Electric did not provide any specific guidance for 2013 or 2014 but hinted that top-line performance will remain sluggish, given its end-market exposure, present economic policy uncertainty and global growth forecast.

The heavy fabrication sector, which includes earthmoving, mining and agricultural equipment; as well as the shipbuilding sector, remain challenged. The company has been facing persistent weakness in Australia and China and any near-term improvement seems uncertain.

Other Stocks to Consider

Currently, Lincoln Electric has a Zacks Rank #2 (Buy). Other players that are worth considering in the sector include Xylem Inc. (XYL - Analyst Report), DXP Enterprises, Inc. (DXPE - Snapshot Report) and Graham Corp. (GHM - Snapshot Report). While Xylem has a Zacks Rank #1 (Strong Buy), DXP Enterprises and Graham Corp. carry the same Zacks Rank  as Lincoln Electric.

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