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Lincoln Electric (LECO) Poised To Grow Despite Headwinds

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We issued an updated research report on Lincoln Electric Holdings Inc. (LECO - Free Report) on Mar 15, 2017. The manufacturer and reseller of welding and cutting products is poised to gain from continuous focus on cost reduction, acquisitions, strength of product pipeline and a welding volume recovery. However, foreign exchange headwinds and weak industrial demand remain headwinds.

Lincoln Electric’s fourth-quarter earnings registered an 8% year-over-year growth despite a 0.7% dip in revenues. While earnings came in line with the Zacks Consensus Estimate, revenues beat the same. The company expects low-single digit sales growth in 2017 with modest margin and earnings growth. Lincoln Electric’s 2017 outlook has improved owing to the recovering international and North American welding markets. International volume growth turned positive in the fourth quarter and management is anticipating a welding volume recovery in 2017 in all its geographic regions.

The company’s short-term initiatives are focused on reducing the impact of current end-market conditions and maintaining the cost-reduction actions outlined in 2015. These actions will aid growth in the coming quarters. Further, it continues to remain focused on customers and executing its 2020 vision and strategy. The company’s product pipeline also remains strong.

Notably, Lincoln Electric continues to undertake initiatives to drive improved returns through acquisitions. Its Vizient buyout will help in diversifying the company’s end-market exposure in addition to expanding growth opportunities globally. Vizient’s system-design capabilities will also complement its current offering. Lincoln Electric has been consistently investing in welding automation, which is a growth product category due to the shortage of welding labor and new, low-cost welding robots that provide a productivity savings to customers. Further, the company is currently negotiating with Air Liquide to acquire its France-based subsidiary, Air Liquide Welding. Air Liquide Welding is an important player in the manufacturing of welding and cutting technologies and by scale, it is among the top-three competitor in Europe selling mostly consumables. If this deal goes through, it will expand Lincoln Electric’s exposure in Europe and improve profitability in the region. The deal is expected to be earnings accretive.



In the past one year, Lincoln Electric has recorded an average return of 54.9%, significantly outperforming the Zacks categorized Manufacturing -Tools and Related Products sub industry's gain of 39.6% in the same time frame.

However, the company’s stretched valuation is a concern. Its trailing 12-month price earnings (P/E) ratio is 26.79 while the Zacks categorized Manufacturing -Tools and Related Products  sub industry’s average trailing 12-month P/E ratio is pegged lower at 21.92. This implies that the stock is overvalued and hence, we caution the investors against entering the stock at this point.

Given its focus on innovation as a key value proposition and differentiator, Lincoln Electric continued to increase investment in product development with higher R&D spending year over year. Though this has long-term benefits, it will impede margins in the near term. A stronger U.S. dollar will continue to affect the company’s exports. Persistent weakness in industrial production also remains a concern.

Lincoln Electric currently carries a Zacks Rank #3 (Hold).

Stocks to Consider

Some better-ranked stocks in the same space include ACCO Brands Corporation (ACCO - Free Report) Parker-Hannifin Corporation (PH - Free Report) , and Altra Industrial Motion Corp. , ACCO Brands generated a positive average earnings surprise of 24.74% in the trailing four quarters and sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Parker-Hannifin has delivered an average positive earnings surprise of 12.44% in the last four quarters and flaunts a Zacks Rank #1. Altra Industrial Motion has a positive average earnings surprise of 12.49% in the last four quarters and carries a Zacks Rank #2 (Buy).

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