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Why Is Lincoln Electric (LECO) Down 9% Since the Last Earnings Report?

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It has been about a month since the last earnings report for Lincoln Electric Holdings, Inc. (LECO - Free Report) . Shares have lost about 9% in that time frame, underperforming the market.

Will the recent negative trend continue leading up to the stock's next earnings release, or is it due for a breakout? Before we dive into how investors and analysts have reacted of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Lincoln Electric's Q2 Earnings Beat on Higher Volumes

Lincoln Electric reported adjusted earnings of $0.97 per share in second-quarter 2017, up 17% year over year. Earnings also surpassed the Zacks Consensus Estimate of $0.94.

In the second quarter, the company witnessed sales growth across all three segments as well as in most end markets. Operational initiatives and volume improvements helped counter inflated raw material costs and operating expenses.

Including one-time items, earnings in the reported quarter came in at $0.92 compared with $0.45 recorded in the prior-year quarter. The reported quarter’s earnings per share include acquisition transaction and integration costs of $0.05 per share, related to the proposed acquisition of Air Liquide Welding.

Total revenue went up 5.8% year over year to $627 million, driven by 3.2% higher volumes and 2.6% increase in product prices. However, excluding Venezuela from prior-year results due to the deconsolidation of the operation, sales increased 6.9% on the back of 4.2% higher volumes and a 2.7% increase in price. Sales also beat the Zacks Consensus Estimate of $622 million.

Costs and Margins

Cost of goods sold increased 5.1% year over year to $409 million. Gross profit advanced 7% year over year to $217 million. Gross margin expanded 40 basis points (bps) year over year to 34.7%.

Selling, general and administrative expenses flared up 8% to $130 million from $120 million recorded in the prior-year quarter. Adjusted operating profit rose 12% year over year to $92 million in the reported quarter. Operating margin expanded 80 bps year over year to 14.7%.

Financial Update

Lincoln Electric had cash and cash equivalents of $396 million at the end of second-quarter 2017 compared with $379 million at the end of 2016. Cash flow from operations came in at $75.4 million in the reported quarter compared with $102 million recorded in the year-ago quarter.

On Apr 27, Lincoln Electric entered into an agreement with Air Liquide to acquire its France-based subsidiary, Air Liquide Welding for $131 million, including the assumption of net debt and working capital adjustments.  Air Liquide Welding is an important player in the manufacturing of welding and cutting technologies, and had a turnover of around €350 million ($427 million) in 2016.

Backed by sustained improvement in year-over-year demand, Lincoln Electric expects modest sales and margin growth in 2017.

How Have Estimates Been Moving Since Then?

Following the release, investors have witnessed an upward trend in fresh estimates. There has been one revision higher for the current quarter. While looking back an additional 30 days, we can see even more upward momentum. There have been two moves higher compared to one lower in the last two months.

Lincoln Electric Holdings, Inc. Price and Consensus

VGM Scores

At this time, Lincoln Electric's stock has a nice Growth Score of B, though it is lagging a lot on the momentum front with a D. Following the exact same course, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

The company's stock is suitable solely for growth based on our styles scores.

Outlook

While estimates have been broadly trending upward for the stock, the magnitude of these revisions has been net zero.The stock has a Zacks Rank #3 (Hold). We expect in-line returns from the stock in the next few months.




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