Favorable Demand Aids Lincoln Electric Amid Rising Costs

On Feb 27, we issued an updated research report on Lincoln Electric Holdings, Inc. LECO. The company is poised to gain from favorable end-markets, focus on product innovation and acquisitions. However, raw material inflation, stronger U.S dollar and ongoing volume compression in International Welding segment might impede the company's near-term growth.

Let's illustrate the factors in detail.

Lincoln Electric continues to witness double-digit organic sales growth in its three major end markets — automotive, heavy industries, energy and construction infrastructure. Though industrial growth decelerated in December, it improved in January and is expected to continue in 2019.

Additionally, the company’s focus on commercializing innovative products 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 likely to aid growth. The launch of the company’s new welding technology and training center, and the expansion of two new Well Tech Centers in Dubai and Shanghai will help showcase and customize solutions for global and regional customers.

The company is also preparing for the launch of its new additive services business which will position Lincoln Electric as a manufacturer of large scale 3D-printed metal spell parts, prototypes and tooling for industrial customers. This is likely to act as a catalyst for Lincoln Electric. It also continues to invest in long-term strategy for automation in support of its 2020 strategy initiatives.

In January 2017, Lincoln Electric completed its acquisition of Air Liquide Welding, a subsidiary of Air Liquide. The buyout has enhanced the company’s global specialty consumables portfolio and extended its channel reach for equipment systems and cutting, soldering and brazing solutions in Europe. The company is extremely focused on the integration.

In December 2018, Lincoln Electric acquired Inovatech Engineering Corporation and its related assets to boost its automated cutting solutions and application expertise for structural steel applications. The acquisition will primarily add to Lincoln Electric’s Harris Products Group’s performance. During December, Lincoln Electric also acquired Coldwater Machine Company, Pro Systems LLC and related assets to expand its portfolio of automated cutting and joining solutions.

In January 2019, Lincoln Electric acquired the soldering business of Worthington Industries. It has also agreed to buy certain brazing assets of Worthington. These buyouts will enhance the company’s product portfolio, accelerate growth in the retail channel and aid its Harris business. These three acquisitions are expected to contribute $85 million to $90 million of revenues in 2019.

Raw material inflation will remain a headwind in 2019. Although Lincoln Electric continues to announce new pricing actions, incremental margins could remain choppy from quarter to quarter due to the timing of its response.

The company anticipates organic sales growth rate in 2019 to be at low to mid-single digit percent. The lower expectations can be attributed to challenging year-over-year comparisons and ongoing volume compression in International Welding segment owing to the ongoing Air Liquide integration. Further, weak European demand remains a concern for the segment.

Shares of the company have outperformed the S&P 500 over the past three months. The stock has gained 2.8% compared with 1.8% growth recorded by the S&P500

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

A few better-ranked stocks in the Industrial Products sector are Mueller Industries, Inc. MLI, Alarm.com Holdings, Inc. ALRM and Albany International Corp. AIN, each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Mueller Industries has expected earnings growth rate of 2.2% for 2019.

Alarm.com has expected earnings growth rate of 7.8% for 2019.

Albany International has expected earnings growth rate of 44.7% for 2019.

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