Lincoln Electric (NASDAQ: LECO) has seen its shares surge in recent times. While I previously assessed that this quality business reached a fair value near $200 last September, the company has surpassed those levels. Despite my initial caution based on a fair market multiple re-rating, shares have continued to climb and currently trade at a significant premium. Even considering a recent acquisition, I believe the current share price does not warrant further investment.
A Thriving Business
Established in the late 19th century, Lincoln Electric has become a reputable manufacturer of welding equipment and related consumables. It boasts extensive operations, particularly in North America, where it competes with the likes of Illinois Tool Works (ITW) and ESAB (ESAB). The company benefits from various long-term megatrends that support its growth, such as infrastructure investments, renewable energy initiatives, and labor shortages. Amidst these trends, Lincoln’s products and solutions, including automation, welding and cutting solutions, educational products, and gas management systems, are in high demand. Its diversified operations employ approximately 12,000 workers across over 70 manufacturing and automation facilities worldwide.
In 2022, the company reported a 16% increase in full-year sales, reaching $3.76 billion. Sales are well-diversified, with equipment and consumables contributing roughly equally, and North America generating the majority of revenue. Lincoln’s products primarily serve general fabrication, heavy industries, energy and process industries, automotive and transportation, and construction and infrastructure. The company’s operating profit stood at $613 million for 2022, resulting in a net income of $472 million and diluted GAAP earnings per share of $8.04.
2023 Multiple Re-Rating
At the start of 2023, Lincoln Electric traded around a market multiple, with earnings exceeding $8 per share for 2022 and expectations of further growth. This earnings power was projected to surpass $8 per share by 2023, closer to $9 per share, as the stock price rose to $180 in September. Consequently, valuation multiples expanded to approximately 20 times earnings, prompting my cautious stance. However, my caution proved premature, as shares soared to $260 in March and continue to trade around $238 per share.
Recent Developments and Future Outlook
The robust share price performance is attributed to the company’s solid business performance. In October, Lincoln Electric announced an 11% dividend increase, resulting in a payout of $2.84 per share. Later that month, the company reported a 10.5% increase in third-quarter sales, which may be partially attributed to acquisitions, as organic sales remained relatively flattish. In February, the company revealed a 13.7% increase in fourth-quarter sales to $1.1 billion, with organic growth reaching 2%.
For the full year, Lincoln Electric achieved an 11% sales increase to $4.19 billion, while operating margins improved by 80 basis points to 17.1%. Operating profits of $717 million translated into after-tax earnings of $545 million, and earnings per share reached $9.37, exceeding my initial estimate of $9 per share. The company’s net debt of $712 million is relatively modest. Adjusted EBIT for 2023 amounted to $731 million, with EBITDA slightly higher. This resulted in leverage ratios below 1 times.
With Lincoln Electric continuing to perform well and earnings power approaching $10 per share, it deserves recognition. Based on an earnings per share of $10, forward earnings multiples have expanded to around 24 times earnings. However, the company’s modest leverage provides ample opportunities for mergers and acquisitions, assuming it can identify suitable targets.
In early April, Lincoln Electric announced the acquisition of RedViking, a privately held automation system integrator specializing in autonomous guided vehicles, mobile robots, and related software. While financial details of the purchase were not disclosed, the business is expected to contribute $70 million in annual sales. This acquisition, valued at approximately a quarter of a billion dollars based on Lincoln Electric’s sales multiple, is a relatively small addition to the company’s overall operations. Nonetheless, it strengthens the automation segment and enhances the company’s overall growth profile. I anticipate further insights into the deal and its impact in the upcoming earnings release.
Despite these positive developments, the company anticipates choppy order trends and dynamic operating conditions in 2024. Organic sales growth is projected to be in the low to mid-single digits (half from volume and half from price), supported by new business lines such as fast chargers. Considering the 50% increase in share price over the past 12 months and the low twenty-times earnings multiple, I believe it is prudent to adopt a wait-and-see approach before investing in Lincoln Electric. I am confident that more favorable entry points will emerge, particularly with recent market sell-offs in other sectors.
