Here's How Lincoln Electric Performed In 2014
- Lincoln Electric sports a rock solid balance sheet.
- Lincoln Electric experienced volume decline in the Asia-Pacific and South American regions due to macro-economic weaknesses.
- Lincoln Electric’s long-term potential remains despite short-term challenges.
On Feb. 17, welding equipment and supply company Lincoln Electric (NASDAQ: NASDAQ:LECO) came out with its 2014 earnings announcement. The company didn't do so well in 2014. Lincoln Electric saw its revenue and net income decrease 1% and 13% respectively year-over-year. However, favorable changes in working capital and lower capital expenditures caused free cash flow to increase 31% year-over-year.
Lincoln Electric sports an excellent balance sheet. Its $278 million in cash equated to 22% of stockholder's equity. I like to see companies harbor cash of at least 20% or greater of stockholder's equity. The company only registered minimal long-term debt with its $2.5 million in long-term debt coming in at a miniscule 0.2% of stockholder's equity, way below my personal threshold of 50%. Let's take a closer look at how the company is doing.
Demand puts a dent in the fundamentals
There are three primary factors within a company's control (to a certain degree) that can cause a company's revenue to grow or contract (in order of personal preference)-volume, pricing and acquisitions. Lincoln Electric's volume or demand negatively impacted revenue by $58 million in 2014. The story behind the demand decline is telling of the global risks in owning a company like Lincoln Electric. Macroeconomic headwinds contributed to softness in the South American segment. Specifically, instability in Venezuela contributed to the bulk of demand decline for Lincoln Electric. The Asia-Pacific region and certain parts of Eastern Europe such as Russia also contributed to demand softness. Foreign currency exchange contributed to the bulk of the overall revenue decline. However, I don't worry about foreign currency exchange because it doesn't reflect the underlying economics of the business.
Management is on top of things
Despite international headwinds, Lincoln Electric's management is forging ahead with its strategies. The company is making strategic acquisitions in the areas of manufacturing automation. Also, Lincoln Electric is focusing on containing costs with restructuring in China and cost reductions in the European segment. In its latest earnings call, Lincoln Electric kept emphasizing the strength in its North American territory, due to a recovering economy, where the company derives the bulk of its revenue and wants to invest more money.
I am encouraged by the fact that the company wants to maintain prudent financial management. Lincoln Electric's management emphasized the fact that any strategic moves will come with the smallest amount of long-term debt possible. Moreover, the company is focused on maximizing working capital to improve operating cash flow.
Thoughts on the future
There are a lot of headwinds working against Lincoln Electric in the short to intermediate term. A decline in oil prices will serve as a catalyst for lower demand from Lincoln Electric's oil producing customers. Mining is still weak. Macroeconomic and geopolitical factors will remain an issue in 2015. However, foreign economies like domestic economies will eventually rebound. Lincoln Electric remains committed to meeting global demands. The same can be said about oil. When the global economy rebounds Lincoln Electric and its shareholders stand to benefit.
Should I buy?
Right now the company trades at P/E ratio of 21 vs. 18 for the S&P 500 which is a little pricey for a company plagued with international macroeconomic issues. While I am bullish on this company long-term investors may want to try and wait for a better price in the next few months. If you don't want to wait for a better price, I believe this company will be a superior investment over the long-term. Just expect a great deal of volatility in the short term.
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