Lincoln Electric Holdings, Inc.
(LECO - Free Report
) is likely to gain from improving end-markets, acquisitions, product launches, execution of the 2020 vision and strategy despite raw material inflation and weak European demand.
The company also outpaced the Zacks Consensus Estimate in two of the trailing four quarters, while coming in line in one. This resulted in an average positive earnings surprise of 1.56%. The company has an estimated long-term earnings growth rate of 13%.
The company, with a market capitalization of approximately $5.3 billion, currently carries a Zacks Rank #3 (Hold). Below, we briefly analyze the company's potential growth drivers and possible headwinds.
Factors Favoring Lincoln Electric
Positive Growth Projections: The Zacks Consensus Estimate for fiscal 2018 is currently pegged at $4.74, reflecting year-over-year growth of 25%. The same metric for fiscal 2019 is pegged at $5.39, projected growth of 13% above 2018 levels.
The stock has fallen around 7% over the past year, compared with the industry
’s decline of 22%.
Return on Assets (ROA): Lincoln Electric has a ROA of 12.3%, while the industry's ROA is 6.7%. An above-average ROA denotes that the company is generating earnings by effectively managing assets.
Return on Equity (ROE): Lincoln Electric's trailing 12-month ROE of 31.8% reinforces its growth potential. The company's ROE is much higher than the industry’s 17.4%, highlighting the company's tactical efficiency in using shareholders' funds.
Upbeat Q3 Performance: Lincoln Electric delivered adjusted earnings of $1.21 per share in third-quarter 2018, surging 30% year over year. The year-over-year improvement can be attributed to strong growth in Americas, the benefits of global initiatives, acquisition synergies and tax reform.
Growth Drivers in Place: Lincoln Electric continues to witness double-digit organic sales growth in its three major end markets — automotive, heavy industries, general fabrication and energy. The current sales trends signal accelerating global industrial demand this year. Additionally, the company’s focus on commercializing innovative product and cost-cutting initiatives is likely to stoke growth. Lincoln Electric has increased investment in research and development, and continues to roll out several solutions in the automation solutions market. These product launches are key catalysts.
For the current year, the company remains well poised for growth, driven by its ongoing strategic initiatives. It continues to invest in long-term strategy for automation in support of its 2020 strategy initiatives.
In January 2017, Lincoln Electric completed the buyout of Air Liquide Welding, a subsidiary of Air Liquide. The acquisition has enhanced the company’s global specialty consumables portfolio, and extended channel reach for equipment systems and cutting, soldering and brazing solutions in Europe. The buyout also offers European customers more comprehensive welding solutions, greater technical application expertise and improved service levels. The Air Liquide Welding acquisition contributed 2 cents to adjusted earnings per share in the third quarter and is expected to contribute 6 cents to earnings in the fourth-quarter 2018.
Headwinds to Counter
The company expects a double-digit volume decline in the International Welding segment to persist till the first quarter of fiscal 2019, owing to the ongoing Air Liquide integration. Further, weak European demand remains a concern.
Lincoln Electric’s Harris Products segment witnessed a tougher margin comparison in the second and third quarter of 2018. Further, lower commodity prices continue to hinder margins. The company is likely to face similar situation in fourth-quarter 2018 at Harris owing to rise in cost and inflationary pressure against the pricing management.
Raw material inflation will remain a headwind in 2018. Even though the company continues to announce new pricing actions, incremental margins could be choppy from quarter to quarter due to the timing of its response.
Investors might want to hold on to the stock, at present, as it has ample prospects of outperforming peers in the near future.
Stocks to Consider
Enersys has a long-term earnings growth rate of 10%. Its shares have rallied 24% in a year’s time.
CECO has a long-term earnings growth rate of 15%. The company’s shares have surged 44% over the past year.
Flowserve has a long-term earnings growth rate of 17.3%. The stock has gained 15% year to date.
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