Lincoln Electric (NASDAQ:LECO) is a holding company that deals largely with the massive demand of designing and manufacturing welding and cutting products. It has been a leading global multinational company in the welding industry ever since it was founded in 1895. This company is headquartered in Euclid, Ohio but has expanded to 44 manufacturing locations to accommodate diverse operations and joint venture in 19 countries. It has been around for more than a hundred years and the time has come for the readers to see the business model of LECO and what makes it one of the most studied cases in Harvard Business School.
This article will focus on making the readers see the bigger picture of the company in terms of analyzing its fundamentals. Is LECO capable of generating sustainable growth revenue? Can this company produce robust cash flow and a healthy balance sheet?
Beating the Market
The chart above represents the performance of LECO's stock with respect to the movement of NASDAQ year-to-date. Since FY2003, the market index has outperformed the stock, but in recent periods the stock return has improved significantly more than NASDAQ's. The chart sets up the company to an upward momentum as the market slowly considers that LECO is an undervalued stock. The trends in the past five years suggest that the stock of the company is at the early stage of its transitional period. The company posted a stock price return of 22.78% year-to-date, reaching an all-time high since its IPO. In addition, analysts estimate that the current P/E of 18.23x might go down to 17.23x next fiscal year due to the anticipated proportionate increase in earnings of the company. This chart proves the notion that the stock price of LECO is due for more upside.
Source: Bloomberg Businessweek
Year-on-year, LECO has been able to grow its revenues from $1.7B to $2.8B. The amount is a significant increase relative to the history of the financials of the company. In FY2013, I estimate that the revenues might hit a record-high of $3B so investors can start accumulating shares now to maximize the predicted upside.
Furthermore, LECO has posted total revenues CAGR of 18.2% since FY2009 as the management finds more efficient ways to distribute and network their welding products throughout 19 different countries. Next, gross profit also shows a high compounded annual growth rate of 23.9% due to the team's controlling of expenses related to the raw materials. The operating income posted a CAGR of 45.6%, which can be mostly attributed to the decreased SGA expenses of the company. Moreover, the company received $327.5M, or a 69% increase, in cash flow from operations due to the increased total revenues and will most likely to continue in FY2013.
This chronological narrative of financial analysis about LECO proves that the company is still perfectly capable of increasing the source of their sustainable core income as they minimize their expenses. The impressive growth rates are indications that LECO is indeed an undervalued stock.
Ratios and Margin Analysis
LECO's ROA and ROE are currently standing at 11.54% and 19.47%, respectively. The company has been able to maximize their shareholder's value by efficiently using all their available assets to generate profits. These ratios are above the industry averages but what makes these ratios more meaningful is that the company's capital structure uses very little debt. LECO has also maintained a healthy balance sheet with a current ratio of 2.5x, which is an indication that their current assets can fulfill all their short-term financial obligations with minimal leverage risks. The company also has the option to add a little more debt in their capital should there be a need for funding due to expansion and working capital requirements.
In terms of profitability, the company has been doing a great job in keeping the margins at healthy levels. LECO's EBITDA margin posted a very strong 15.75%. It is high relative to the business model of a manufacturing company. It means that the management has the expertise to control the expense of massive physical operating factories in different locations.
However, if the company seeks to increase its financial attractiveness more, it has to work on its operational efficiency. LECO is among the industry's worst when it comes to receivables turnover with 49.07 worth of sales outstanding.
Yes. The company can still generate sustainable core income. Yes. The company can produce robust cash flow. Yes. The company has maintained a healthy balance sheet. Though the company seems to lack popularity, I am sure it is well on its way to becoming one of the most highly valued stocks in America. I recommend a BUY position in LECO.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.