Lincoln Electric (LECO) Bets on Cost Control Amid Weak Demand

On Jan 6, we issued an updated research report on Lincoln Electric Holdings Inc. LECO. The company is poised to gain from focus on innovative product launches, utilizing digital platforms to engage customers and successful acquisitions. However, the coronavirus pandemic’s impact is likely to dent Lincoln Electric’s revenues in the near term. Nevertheless, the company’s cost reduction actions are expected to help sustain margins.

New Products & Acquisitions to Drive Growth

Lincoln Electric is committed to new 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 new additive services business, which will position it as a manufacturer of large scale 3D-printed metal spell parts, prototypes and tooling for industrial customers. This is likely to contribute to Lincoln Electric’s growth.

The company continues to expand brand’s geographic and channel reach into attractive areas such as automation in support of its 2020 strategy initiatives. Lincoln Electric launched its new state-of-the-art advanced technology solution center in Germany, which provides it an unprecedented commercial presence in the European market. This tech center will enable the company to showcase its latest technologies and welding consumables, equipment and automation.

It is also benefiting from several buyouts. Lincoln Electric acquired Inovatech Engineering Corporation and Coldwater Machine Company, Pro Systems LLC, which bolstered its automated cutting solutions and application expertise. In January 2019, Lincoln Electric acquired the soldering business of Worthington Industries, Inc. WOR. This broadened the Harris Products Group’s portfolio of industry-leading consumables with the addition of premium solders and fluxes. In April 2019, Lincoln Electric acquired Baker Industries to expand automation and additive strategies. Recently, the company acquired a controlling interest in Askaynak, a leading Turkish producer of welding consumables and equipment. The buyout advances the company's regional growth strategy in Europe, the Middle East and Africa.

Savings from Cost Reduction to Offset COVID-19 Impact

The COVID-19 pandemic has impacted Lincoln Electric’s markets and operations, which include weakening demand, supply chain disruptions, and other logistics constraints. Automotive, transportation, energy, construction and heavy industries have all been impacted. This will continue to impact the company’s results until the situation stabilizes.

Even though many of the company’s customers have begun to re-open or increase operating levels, such customers may be forced to close or limit operations due to resurgence of COVID-19 cases. In addition to weak demand, increase in customer facility closures and the persistent risk of possible supply chain disruptions are expected to result in lower operating activity and higher inefficiencies in the business.

Lincoln Electric has been focusing on cost management to sustain margins in the backdrop of weak demand. These measures include reducing work hours and overtime, lowering headcount, deferring annual wage increases, cutting down discretionary spending and eliminating travel. After yielding benefits of around $80 million to $85 million in 2020, the company expects to realize $10 to $11 million in permanent costs savings per quarter.

Price Performance

Lincoln Electric’s shares have gained 24.4% in the past year, against the industry’s decline of 11.8%.

Zacks Rank & Stocks to Consider

The company currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the Industrial Products sector include AGCO Corporation AGCO and Crown Holdings, Inc. CCK, each carrying a Zacks Rank of 2 (Buy), at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

AGCO has a long-term earnings growth rate of 13.2%. The stock has appreciated 45% in the past year.

Crown Holdings has a long-term earnings growth rate of 5%. Shares of the company have gained 42% in a year’s time.

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Lincoln Electric Holdings, Inc. (LECO) : Free Stock Analysis Report
 
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