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Lincoln Electric Rides on Cost Control Despite Weak Demand

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On Apr 3, we issued an updated research report on Lincoln Electric Holdings Inc. (LECO - Free Report) . Focus on acquisitions, innovative product launches and execution of the 2020 vision and strategy will drive the company’s growth. However, impact of the slowdown in industrial production and the coronavirus outbreak is likely to impact the near-term results. We believe Lincoln Electric’s cost management actions will help sustain margins in this backdrop.

Coronavirus Impact Dents Full-Year Outlook

The U.S.-China trade tensions and waning global demand has taken its toll on the U.S manufacturing sector. The U.S Purchasing Managers’ Index (PMI) as per the Institute for Supply Management remained below 50 (indicating contraction) for five months in a row till December. Although the index has climbed to 50.9 in January followed by 50.1 in February, it remains to be seen whether this recovery will sustain considering the coronavirus outbreak.

Industrial stocks Caterpillar Inc. (CAT - Free Report) , Terex Corporation (TEX - Free Report) have been bearing the brunt of the overall slowdown in industrial production and Lincoln Electric has not been an exception to this trend either.

Volumes in the Americas Welding segment continue to remain challenged thanks to the overall slowdown in industrial production and lower capital spending for automation systems. In the International Welding segment, volumes continue to be impacted by declines in Asia Pacific and Europe, and lower global industrial production.

Also, pricing in the Americas Welding segment declined 1.2% and 1.7% in third-quarter and fourth-quarter 2019, respectively, highlighting the removal of surcharges in the U.S. business. The company anticipates pricing to be lower in first-half 2020.

The impact of the coronavirus outbreak also remains a concern. Factory closures in China will likely reflect of Lincoln Electric’s results in first-quarter 2020. The company also stands the risk of supply chain disruptions. Further, it is also weighing on customer confidence and might impact customer orders.

Cost Management to Buoy Margins

The company is focusing on cost management, which includes lower work hours, less overtime, suspension of new hiring and cutting down discretionary spending. The company is now planning to freeze senior management wages. Lincoln Electric anticipates annualized cost savings of $15-$18 million. This will start from second-quarter 2020 and major part of it will be realized in the back half of 2020.

Acquisitions, Innovation Remain Growth Drivers

In January 2019, Lincoln Electric acquired the soldering business of Worthington Industries.  This broadened the Harris Products Group’s portfolio of industry-leading consumables with the addition of premium solders and fluxes. In April 2019, Lincoln Electric acquired Baker Industries to expand automation and additive strategies. Recently, the company acquired a controlling interest in Askaynak, a leading Turkish producer of welding consumables and equipment. The buyout advances the company's regional growth strategy in Europe, the Middle East and Africa.

Lincoln Electric’s product launches in the automation solutions market are likely to aid growth. The company is also preparing for the launch of its new additive services business, which will position it as a manufacturer of large scale 3D-printed metal spell parts, prototypes and tooling for industrial customers. This is likely to present ample prospects. It also continues to invest in long-term strategy for automation in support of its 2020 strategy initiatives.

The company launched its new state-of-the-art advanced technology solution center in Germany, which gives it an unprecedented commercial presence in the European market. This tech center will enable the company to showcase its latest technologies and welding consumables, equipment and automation.

Price Performance


Lincoln Electric’s shares have fallen 31.4% so far this year compared with the industry’s decline of 41%.

Zacks Rank & a Stock to Consider

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

A better-ranked stock in the Industrial Products sector is Sharps Compliance Corp (SMED - Free Report) which sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today's Zacks #1 Rank stocks here.

Sharps Compliance has an estimated earnings growth rate of 800% for 2020. So far this year, the company’s shares have gained 72%.

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