On Jun 6, we maintained our Neutral recommendation on manufacturer and reseller of welding and cutting products Lincoln Electric Holdings, Inc. (LECO). Our reiteration was primarily based on expected benefits from the company’s acquisition strategy, cost reduction efforts, introduction of new products and long-term growth in its key global markets, but offset by concerns regarding Europe's persistent debt problems and the continuing softness in the construction and related machinery markets in China.
Why Reiterated?
Lincoln Electric’s first-quarter 2013 total revenue slipped 1% year over year to $719 million, but earnings improved 21% to 92 cents per share. Despite softer volumes, Lincoln continues to effectively drive margins through enhanced product mix, optimizing manufacturing footprint and focusing on cost. Lincoln expanded margins across all segments in the first quarter except Europe. The company has almost completed the restructuring actions, which began last year and are expected to lead to $8-$10 million in incremental benefits through lower overhead and manufacturing efficiencies.
Through recent acquisitions (Weartech International, Wayne Trail Technologies, Burny-Kaliburn Tennessee Rand), the company has enhanced its product portfolio in many key high-growth areas such as alloy-based consumables, automated systems and cutting equipment in North America. North America contributes more than 50% to the company’s business and has been the strongest geographic region despite the ongoing uncertain macroeconomic environment.
The company is well positioned to take advantage of the expected long-term growth in its key global markets including power generation, offshore drilling, pipelines and automotive sectors. Lincoln has successfully maintained its product leadership by investing heavily in product development. Its steady pipeline of products is a key contributor as it continues to pursue its Vision 2020 goals of at least 10% compound annual growth and 15% return on invested capital over the 10-year period starting 2011.
Around 32% of Lincoln Electric’s revenue is generated from Europe and Asia. We remain cautious due to Europe's persistent debt problems and the continuing softness in the construction and related machinery markets in China.
Other Stocks to Consider
Other stocks in the industrial sector with a favorable Zacks Rank are Graco Inc. (GGG) with a Zacks Rank #1 (Strong Buy), and W.W. Grainger, Inc. (GWW) and Hudson Technologies Inc. (HDSN) with a Zacks Rank #2 (Buy).
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