Barclays On Lincoln Electric: Company Is Closer To The Bottom Than The Top

Q2, 3 In Review

For the second quarter, the company's Americas welding volume fell 13 percent versus 19 percent last quarter, but the comp was down 6.5 percent versus Q1 2015's down 1 percent. "The company noted some potential diminishing rate of decline in oil and gas," and total organic volume off 25 percent from peak in the second quarter.

In addition, the company took a small hit to materials cost with a LIFO charge of $2 million, which could reflect steel prices.

"The shape of the volume decline curve at Lincoln may soon moderate, while the pricing and materials costs trends are starting to weaken," analyst Robert Wertheimer wrote in a note.

Related Link: Lincoln Electric Buys Vizient Manufacturing Solutions For Undisclosed Terms

Gross margin this quarter was up 30 bps year-over-year, while operating margins declined in its core Americas segment year-over-year by about 100bps and LECO's late 2015 cost program anniversaries after 2016's third quarter.

"If the next two or three quarters pass with no material spike then trough margin might be in the 12 percent range, and the shares at 22x our street low (so far) 2016 estimates might have limited downside," Wertheimer noted.

"Weakened pricing in consumables have offset slight momentum in equipment and decremental targets in the mid 20's implies 2H could be challenging. We're most cautious on Q3 where pricing initiatives would have had to already be announced to have a true impact," the analyst added.

Looking Forward

Wertheimer, who expects another cost program in the fourth quarter if underlying conditions don't improve, has an Equal-Weight rating on the stock. The analyst raised his price target by $3 to $55, but cut the full-year EPS by $0.03 to $3.17. However, the analyst maintained his 2017 EPS estimate at $3.40.

Shares of Lincoln Electric closed Tuesday's regular trading session at $62.72 and were essentially flat at time of writing in Wednesday's pre-market.

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