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It has been about a month since the last earnings report for Lincoln Electric Holdings (LECO). Shares have added about 6.2% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Lincoln Electric due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
Lincoln Electric Q4 Earnings Surpass Estimates, Up Y/Y
Lincoln Electric reported fourth-quarter 2020 adjusted earnings of $1.24 per share, which beat the Zacks Consensus Estimate of $1.07. The bottom line also improved 8% year over year. This upbeat performance can be attributed to the company’s execution of strategic initiatives and cost reduction actions.
Including one-time items, the bottom line came in at $1.08 compared with $1.03 in the prior-year quarter.
Total revenues declined 5.8% year over year to $694 million. However, the top line surpassed the Zacks Consensus Estimate of $687 million. The decline in revenues was due to a decrease of 5.6% in organic sales and an unfavorable impact of 0.2% from foreign exchange.
Costs and Margins
Cost of goods sold went down 6% to $465 million from the prior-year quarter. Gross profit fell 5% to $229 million from $241 million reported in the prior-year quarter. Gross margin came in at 33.0% compared with 32.7% in the year-ago quarter.
Selling, general and administrative expenses declined 9% year over year to $136 million from the prior-year quarter. Adjusted operating profit increased 1.5% year over year to $92.9 million in the quarter. Adjusted operating margin was 13.4% in the reported quarter compared with 12.4% in the year-ago quarter.
Lincoln Electric had cash and cash equivalents of around $257 million at the end of 2020 compared with $200 million at the end of the 2019. The company generated cash flow from operations of $351 million during 2020 compared with $403 million in the prior year.
The company’s debt to invested capital was at 47.6% at the end of 2020 compared with 47.7% as of the end of fiscal 2019.
Lincoln Electric’s adjusted earnings per share in 2020 was $4.15, down 12% from the prior-year’s figure of $4.70. However, the bottom line beat the Zacks Consensus Estimate of $3.97. Including one-time items, the company delivered an earnings per share of $3.42 in 2020 compared with $4.68 in 2019.
Sales decreased 12% year over year to $2,655 million from the prior-year figure of $3,003 million. Nevertheless, the top line surpassed the Zacks Consensus Estimate of $2,648 million.
Lincoln Electric has witnessed improving order rates across all segments lately and thus expects first-quarter organic sales to be flat to modestly higher compared with prior year levels. Despite customer supply chain risks and uncertainties related to the COVID-19 pandemic, the company expects organic sales growth in the high single digits in 2021 backed by this current demand trends.
The company anticipates incremental cost savings between $25 million and $30 million in 2021 from its permanent cost actions. However, it anticipates inflationary headwinds in 2021 stemming from escalating labor, freight and raw material costs. While higher labor costs will be offset by the incremental cost savings, pricing actions will mitigate raw material and freight inflation. Lincoln Electric anticipates incremental margin to average in the mid to high 20% range for 2021.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended upward during the past month.
At this time, Lincoln Electric has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Lincoln Electric has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.
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