The Welding Market Is Getting Worse


• Longbow Research has downgraded Lincoln Electric Holdings, Inc LECO to Neutral.
• The firm sees weak U.S. manufacturing numbers and slumping commodity prices continuing to weigh on the welding industry at least through the end of 2016.
• Longbow still views Lincoln as “best in class” but sees downside to current 2015/2016 earnings estimates.

A new report by Longbow Research analyst Eli Lustgarten paints a grim picture of the U.S. welding industry. Longbow has downgraded Lincoln Electric Holdings and cut estimates for Lincoln and rivals Illinois Tool Works Inc. ITW and Colfax Corp CFX.

What’s happening?
According to Lustgarten, the combination of weak commodity prices and lackluster manufacturing numbers is severely impacting the welding industry. Longbow is predicting that, without any foreseeable catalysts in the near term, the industry will continue to struggle at least through the end of 2016.

Lustgarten predicts that welding companies will likely need to combat the poor environment by making some creative changes to their operations. “Welding companies will likely resort to more cost-cutting measures and possibly share repurchases in an effort to hold profitability amid a declining top line,” he explains.

Industry contacts recently indicated that the U.S. general manufacturing industry continues to dial back capital investment.

The downgrade
Longbow has downgraded Lincoln to Neutral, where it joins Neutral-rated peers Illinois Tool Works and Colfax. The firm still sees Lincoln as “best in class,” but Lustgarten expects that the lack of a visible catalyst could soon lead to downward earnings revisions for the company through 2016.

Lustgarten advises that potential buyers of Colfax and Illinois Tool Works remain on the sidelines for now as well. The stocks’ valuations have improved throughout the year along with falling share prices, but Longbow predicts that share prices will likely continue to trade “flat to down” without a meaningful improvement in the market.

Disclosure: the author holds no position in the stocks mentioned.

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