Almost every year, the global economy becomes larger than it had ever been before. The rise in population across the planet, combined with continued entrepreneurial drive aimed at meeting the demands of the populace, ultimately requires a significant amount of infrastructure. Likewise, the number of physical products also increases over time. Whether it's the infrastructure we are talking about or certain goods that are ultimately sold to end-users, one indisputable fact is that we must have the necessary tools in place to make said products a reality. One company dedicated to this mission is Lincoln Electric Holdings (NASDAQ:LECO). Despite experiencing pain during the COVID-19 pandemic, the company rebounded in 2021. In addition to that, strength seems to be growing into the early part of 2022. All those shares of the company are far from cheap, the rapid growth the business is experiencing makes it a worthwhile prospect to analyze. In the event that we do see financial performance eventually weaken, I could see the stock being more or less fairly valued. But if recent performance is an indicator of future growth, it may not take much for shares to become underpriced.
Back in February of this year, I wrote my first article about Lincoln Electric. At that time, I acknowledged the resurgence in revenue and cash flows the company experienced following a relatively difficult 2020 fiscal year. The overall trend for the company was positive, but I also realized that, in the years leading up to the pandemic, financial performance had been rather volatile. Due to this, combined with the pricing of the company at that time, I decided to rate it a ’hold’. Since then, the business has outperformed my expectations. Even though the S&P 500 has seen a decrease in value of 8.9%, shares of Lincoln Electric have generated a profit for investors of 5.6%.
The only data that we currently have today that we did not have in my aforementioned article covers the first quarter of the company's 2022 fiscal year. And what a quarter that was. After seeing revenue rise from $2.66 billion in 2020 to $3.23 billion in 2021, we experienced a further increase in early 2022. During that quarter, revenue came in at $925.4 million. That translates to a 22.2% increase over the $757 million the company generated just one year earlier. Some companies can be rather vague in what contributes to their upside or downside from year to year. But fortunately for investors, Lincoln Electric is quite transparent.
According to management, the increase in revenue which driven in large part by a $143.1 million increase in prices charged for their products. This accounted for 18.9% of the 22.2% rise in revenue year over year. In short, as input costs increased for the company, management succeeded in passing those on to the company's customers. However, there were other contributors to the increase. Acquisitions added $34.8 million to the company's top line, while increased volume added $24.1 million. Meanwhile, foreign currency fluctuations hurt the business to the tune of $33.7 million. Most of this increase in sales for the company came from its Americas Welding segment. This unit alone reported a 25.6% increase in sales, with revenue rising from $425.2 million to $534.1 million. International Welding reported a more modest increase of 15.7%, while The Harris Products Group saw revenue rise by 22.2%.
As revenue increased, so too did profitability. Based on the data provided, net income for the latest quarter came in at $126 million. That's almost double the $74.2 million generated the same time last year. Although the company saw profits for The Harris Products Group weaken relative to sales, with the adjusted EBIT margin for the firm declining from 16.9% to 14.4%, margins improved significantly for the other company’s segments. For the Americas Welding segment, the margin rose from 16.7% to 19.8%. And for the International Welding segment, it increased from 8.3% to 14%. In short, even though the company succeeded in passing increased expenses off to its customers, it did so in a way that basically overshot. Naturally for shareholders, this overshoot was a positive.
We should also look at other profitability metrics. Operating cash flow actually decreased for the company, falling from $45.3 million to $43.1 million. However, if we adjust for changes in working capital, it would have risen from $92.4 million to $139.8 million. Meanwhile, EBITDA for the company also increased, rising from $131.8 million to $183.3 million. Management did not seem to offer any real guidance for the 2022 fiscal year. In addition, it is rather early to simply annualize results seen so far for the year and assume that will represent the rest of the year. But in the absence of any other scenario, that is what I decided to do. Based on my estimates, net income for the company should be around $469.5 million for the year. Operating cash flow should be $697.4 million. And EBITDA should come in at around $711.9 million. I will use these results in pricing the company. But also, to be conservative, I will also price the company using the 2021 results already reported.
At present, shares of Lincoln Electric are trading at a price-to-earnings multiple of 27.5. This compares to the 27.1 the company was trading for when I last wrote about it. However, if 2022 estimates come to fruition, then the price to earnings multiple should drop considerably to 16.2. Using the price to operating cash flow approach, the current multiple for the company is 20.8. That's up modestly from the 20.5 when I last wrote about it. However, it's nearly double the 10.9 the company is trading for on a forward basis. If we use the EV to EBITDA approach to valuing the company, then shares are trading at a multiple of 16.2. That's up from the 15.8 reading we get if we use the 2021 figures from my last article. By comparison, if the 2022 estimates come to fruition, this multiple should decrease to 11.7.
Also as part of my analysis, I decided to compare Lincoln Electric to five similar firms. On a price-to-earnings basis, these companies ranged from a low of 5.4 to a high of 51.2. Using our 2021 results, four of the five companies are cheaper than our prospect. But if the 2022 estimates turn out to be accurate, then two of the five are cheaper. Using the price to operating cash flow approach, the range is from 7.7 to 299.3. Three of the five companies were cheaper than our prospect, while only one is cheaper if the 2022 estimates are correct. And finally, the EV to EBITDA multiple of the companies range from 3.6 to 21.6. Four of the five firms are cheaper than Lincoln Electric, while this number drops to two if the 2022 estimates are accurate.
|Company||Price / Earnings||Price / Operating Cash Flow||EV / EBITDA|
|Lincoln Electric Holdings||27.5||20.8||16.2|
|Dover Corporation (DOV)||17.3||20.1||12.0|
|Standex International (SXI)||18.4||14.3||9.7|
|Mueller Industries (MLI)||5.4||7.7||3.6|
Right now, Lincoln Electric is a very interesting prospect because of the recent rampant growth the business reported. For the most part, shares are priced at a level that are similar to what they were when I last wrote about the firm. So because of this, I see the worst-case scenario for the company being a ‘hold’ opportunity still. But if the first quarter of this year is any indication of what the company will look like moving forward, shares start to become attractive rather quickly. I do not think we have enough data to say that will definitely be the case. So because of that, I will still elect to rate the enterprise a ‘hold’ until more data comes through. But I do think that investors should continue to watch the business closely, with continued strength being a sign that the picture is changing for the better.
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This article was written by
Daniel is currently the manager of Avaring Capital Advisors, LLC, a registered investment advisor that oversees one hedge fund, and he runs Crude Value Insights, a value-oriented newsletter aimed at analyzing the cash flows and assessing the value of companies in the oil and gas space. His primary focus is on finding businesses that are trading at a significant discount to their intrinsic value by employing a combination of Benjamin Graham's investment philosophy and a contrarian approach to the market and the securities therein.
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.