Lincoln Electric Downgraded To Hold On Lingering Concerns

On Jun 16, Lincoln Electric Holdings Inc. (NASDAQ:LECO) was downgraded to a Zacks Rank #3 (Hold).

Why the Downgrade?

Year to date, Lincoln Electric has outperformed the Zacks categorized Manufacturing - Tools & Related Products subindustry. The stock has yielded 26.4%, ahead of the subindustry’s gain of 23.5%.

However, the company’s stretched valuation is a concern. Lincoln Electric’s trailing 12-month price earnings (P/E) ratio is 28.3, while the Zacks categorized Machine -Tools and Related Products industry’s average trailing 12-month P/E ratio is pegged lower at 23.54. This implies that the stock is overvalued.

A stronger U.S. dollar will continue to affect the company’s exports. Persistent weakness in industrial production also remains a concern. Further, the ongoing declines in the energy and heavy fabrication sectors will continue to impact results.

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.

Nevertheless, Lincoln Electric has been consistently investing in welding automation which is on growth path owing to the shortage of welding labor and new, low-cost welding robots that provide productivity savings to customers. In the past five years, the company acquired welding automation companies for approximately $320 million. On Mar 2, Lincoln Electric entered into exclusive negotiations with Air Liquide (PA:AIRP) to acquire its France-based subsidiary, Air Liquide Welding. The proposed acquisition is subject to a definitive agreement between the parties, and customary conditions as well as other provisions. Air Liquide Welding is an important player in the manufacturing of welding and cutting technologies, and had a turnover of around €350 million ($427 million) in 2016.

Lincoln Electric Holdings, Inc. Price and Consensus