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Here's Why Investors Should Steer Clear of Lincoln Electric

Zacks Equity Research

Shares of Lincoln Electric Holdings, Inc. LECO have been depreciating, due to the overall slowdown in industrial production, weakness in the automotive and transportation sector, lower pricing in the Americas Welding segment, and turbulence in the Asia-Pacific region. Also, a weak share-price performance and lowered earnings estimates reflect investors’ bearish sentiment.

The company, with a market capitalization of $5.7 billion, currently carries a Zacks Rank #4 (Sell). It belongs to the Zacks Manufacturing – Tools & Related Products industry, currently carrying a Zacks Industry Rank #190, which places it at the bottom 25% of the 253 Zacks industries. The overall contraction in the manufacturing sector has been weighing down on the industry.

Lincoln Electric’s third-quarter 2019 earnings and sales missed the respective Zacks Consensus Estimate and declined year over year. The stock has underperformed the industry in the past three months. This Cleveland, OH-based company’s shares have gained 8.1% compared with the industry’s growth of 13.4%.

Factors Affecting Lincoln Electric

Broad global deceleration in demand has resulted in a 4.1% reduction in Lincoln Electric’s volumes during the September-end quarter. Volumes in the Americas Welding segment continue to remain challenged, thanks to the overall slowdown in industrial production and automation product lines. Moreover, pricing in the segment declined 1.2%, reflecting the removal of surcharges in the U.S. business. The company anticipates pricing to be lower through the remainder of the year and the first half of 2020.

In the International Welding segment, volumes continue to be impacted by declines in Asia Pacific, stemming from the sluggish regional automotive and heavy fabrication sector demand. Considering the weak global manufacturing backdrop, uncertainty in the market and cautious customer spending, the scenario is likely to persist in the fourth quarter.

Raw-material inflation will remain a headwind for the current year. Though the company continues to announce new pricing actions, incremental margins might be impacted due to the timing of its response. Given its focus on innovation as a key value proposition, Lincoln Electric continued to increase investments in product development with higher year-over-year R&D spending. Though this has long-term benefits, it will dampen margins in the near term. Also, a stronger U.S. dollar will affect the company’s exports.

Downward Estimate Trend: The Zacks Consensus Estimate for Lincoln Electric’s earnings for the current year and fourth quarter have moved south 5.8% to $4.69 per share and 12.2% to $1.14 per share, from the respective 60-day-ago figure.

The Zacks Consensus Estimate for earnings per share is currently pegged at $1.14 for the fourth quarter and $4.69 for 2019, reflecting a respective decline of 11.6% and 2.7% year over year.

Stocks to Consider

Some better-ranked stocks in the Industrial Products sector are Northwest Pipe Company NWPX, Tennant Company TNC and Reliance Steel & Aluminum Co. RS. All of these stocks sport a Zacks Rank #1 (Strong Buy), at present. You can see the complete list of today's Zacks #1 Rank stocks here.

Northwest Pipe has an expected earnings growth rate of 15.8% for the current year. The stock has appreciated 43.8% over the past year.

Tennant has a projected earnings growth rate of 29.8% for 2019. The company’s shares have rallied 44.2% over the past year.

Reliance Steel & Aluminum has an estimated earnings growth rate of 7.4% for the ongoing year. In a year’s time, the company’s shares have gained 60.8%.

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