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Lincoln Electric Gains on Innovation & Buyouts, Costs Rise

Zacks Equity Research

On May 20, we issued an updated research report on Lincoln Electric Holdings, Inc. LECO. The company is poised to benefit from focus on product innovation, improvement in certain end-markets and acquisitions. However, raw material inflation, ongoing volume compression in International Welding segment and weakness in the automotive sector might impede the company's near-term growth.
Let's illustrate the factors in detail.
Improving End-Markets, Innovative Products to Fuel Growth
Lincoln Electric continues to witness double-digit organic sales growth in heavy industries, construction/infrastructure and Oil & Gas. Rising commodity costs and the related uptick in mining construction, equipment demand to support construction activity and oil and gas infrastructure are acting as catalysts. The company expects momentum in these end-sectors to continue through the balance of the year.
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 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 be a growth driver for Lincoln Electric. It also continues to invest in long-term strategy for automation in support of its 2020 strategy initiatives.
Active on the Acquisition Front
In January 2017, Lincoln Electric completed acquisition of Air Liquide Welding, a subsidiary of Air Liquide. The buyout has enhanced the company’s global specialty consumables portfolio and extended channel reach for equipment systems and cutting, soldering and brazing solutions in Europe.

In December 2018, Lincoln Electric acquired Inovatech Engineering Corporation and Coldwater Machine Company to boost automated cutting solutions. In January 2019, Lincoln Electric acquired the soldering business of Worthington Industries Inc. (WOR) to enhance the company’s product portfolio, accelerate growth in the retail channel and aid Harris business.

In April 2019, Lincoln Electric completed the acquisition of Baker Industries, a provider of parts, fixtures and custom tooling for automotive and aerospace markets. Recently, the company entered into an agreement to purchase an additional 49.6% interest in Askaynak, a leading Turkish producer of welding consumables and equipment. The company currently holds a 50% stake in Askaynak, which it had secured in 1998. Askaynak is a supplier and manufacturer of welding consumables, arc welding equipment, including plasma and oxyfuel cutting equipment, and robotic welding systems and generated approximately $70 million in annual revenues.
Near-term Headwinds
Sales growth is likely to be impacted in 2019 owing to the ongoing volume compression in International Welding segment on account of the ongoing Air Liquide integration. Further, weak European demand particularly in Italy and France remains a concern for the segment. Further, weak automotive end market (which generates around 17% of the company’s revenues) will dent the company’s top line.

Raw material inflation will remain a headwind in 2019. Although Lincoln Electric continues to announce new pricing actions, margins will be impacted.  Given its focus on innovation as a key value proposition, Lincoln Electric continued to increase investment in product development with higher year-over-year R&D spending. Though this has long-term benefits, it will impede margins in the near term.
Share Price Performance

Shares of the company plunged 12.8% over the past year compared with the industry’s decline of 10.9%.

Zacks Rank & Stocks to Consider
Lincoln Electric currently carries a Zacks Rank #3 (Hold).
Some better-ranked stocks in the Industrial Products sector are DMC Global Inc. BOOM, Lawson Products, Inc. LAWS and Roper Technologies, Inc. ROP. While DMC Global and Lawson Products sport a Zacks Rank #1 (Strong Buy), Roper Technologies carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

DMC Global has an estimated earnings growth rate of 79.7% for the ongoing year. The company’s shares have soared 60%, in the past year.

Lawson Products has a stellar expected earnings growth rate of 24.5% for the current year. The stock has appreciated 60% in a year’s time.

Roper Technologies has a projected earnings growth rate of 7.9% for 2019. The company’s shares have gained 26%, over the past year.

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