Lincoln Electric Dips 21% in 3 Months: Will It Recover?

Lincoln Electric Holdings, Inc. LECO shares have lost 20.9% in the past three months compared with the industry's 10% decline. This mainly reflects escalating freight and material costs. Low volumes in the Harris Products Group add to the woes.

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High Costs, Weakness in Harris Products Group Ail

Lincoln Electric is witnessing inflationary headwinds from escalating labor and raw material costs that impacted its margins. In addition, continued risks of possible supply-chain disruptions are expected to result in lower operating activity and higher inefficiencies in the business.
The Harris Products Group's revenues have been bearing the brunt of lower volumes for the past four quarters, reflecting weak demand. Lower volumes primarily reflect soft residential-oriented applications (HVAC, plumbing). This will continue to weigh on the segment's results.
The company has a market capitalization of around $3 billion. It currently carries a Zacks Rank #3 (Hold). Let us discuss the factors that indicate that the stock might stage a comeback.
Strong Backlogs & Demand in Most Markets: Lincoln Electric has witnessed improving order rates across all end-market sectors, regions and products. The company is seeing strong quoting activity and high backlogs for equipment systems and automation solutions. The company's equipment sales are being driven by solid demand across direct and distribution channels. Robust backlog and acquisitions are expected to benefit the company's performance through this year.
Focus on Pricing: LECO has also been effectively managing to counter raw material inflation through pricing actions and improved productivity. Backed by these tailwinds, the company has delivered improvement in revenues in the past 12 quarters. This momentum is expected to continue in the next few quarters as well.
On Track to Achieve Targets: The company has a target of sales CAGR growth of high-single-digit to low-double-digit percentage for 2020-2025, per its Higher Standard 2025 Strategy. The company has delivered a sales CAGR of 12% over the 2020-2023 period, which indicates that it is on track to achieve its goals.
Also, the adjusted EPS CAGR is envisioned at high-teens to low 20% for 2020-2025. The company has witnessed a CAGR of 31% in 2020-2023. For 2024, it expects low- to mid-single-digit organic sales growth and incremental operating income margin in the low-to-mid 20%.
Solid Balance Sheet: Lincoln Electric had cash and cash equivalents of around $375 million at the end of the first quarter of 2024.
The company generated $133 million in cash flow from operations in the first quarter of 2024, up from $124 million in the first quarter of 2023. LECO returned $152 million to shareholders via dividends and share repurchases through the quarter.

Its total debt-to-total capital ratio was 0.46 as of Mar 31, 2024, lower than 0.51 as of Mar 31, 2023. The times interest earned ratio was 18.3 as of Mar 31, 2024. Lincoln Electric has a balanced capital allocation strategy, prioritizing growth investment while returning cash to shareholders.
The company will continue to evaluate M&A options focused primarily on tuck-in assets, supporting its Higher Standard 2025 strategy.
Focus on Growth: Lincoln Electric is focused on product development and using digital platforms to engage customers. Its product launches in the automation solutions market are likely to aid growth. The company is focused on 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 opportunity for Lincoln Electric. The company continues to expand the brand's geographic and channel reach into attractive areas such as automation in sync with its strategy initiatives.

Zacks Rank & Stocks to Consider

Lincoln Electric currently has a Zacks Rank #3 (Hold).
Some better-ranked stocks from the Industrial Products sector are Intellicheck, Inc. IDN, Applied Industrial Technologies AIT and ACCO Brands Corporation ACCO. IDN currently sports a Zacks Rank #1 (Strong Buy), and AIT and ACCO carry a Zacks Rank #2 (Buy).
The Zacks Consensus Estimate for Intellicheck's 2024 earnings is pegged at 2 cents per share. The consensus estimate for 2024 earnings has been unchanged in the past 60 days. The company has a trailing four-quarter average earnings surprise of 28.9%. IDN shares have gained 77.9% in the past three months.
Applied Industrial has an average trailing four-quarter earnings surprise of 8.2%. The Zacks Consensus Estimate for AIT's 2024 earnings is pinned at $9.62 per share, which indicates year-over-year growth of 9.9%. Estimates have moved north by 2% in the past 60 days. The company's shares have gained 2.7% in the past three months.
The Zacks Consensus Estimate for ACCO Brands' 2024 earnings is pegged at $1.07 per share. The consensus estimate for 2024 earnings has been unchanged in the past 60 days. The company has a trailing four-quarter average earnings surprise of 25.9%. ACCO shares have gained 1.5% in the past three months.

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