Welding equipment manufacturer Lincoln Electric (NASDAQ:LECO) met Wall Street’s revenue expectations in Q3 CY2024, but sales fell 4.8% year on year to $983.8 million. Its non-GAAP profit of $2.14 per share was 4.2% above analysts’ consensus estimates.
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Lincoln Electric (LECO) Q3 CY2024 Highlights:
- Revenue: $983.8 million vs analyst estimates of $984.5 million (in line)
- Adjusted EPS: $2.14 vs analyst estimates of $2.05 (4.2% beat)
- EBITDA: $168.2 million vs analyst estimates of $185.4 million (9.3% miss)
- Gross Margin (GAAP): 35.8%, in line with the same quarter last year
- Operating Margin: 14.8%, down from 16.6% in the same quarter last year
- EBITDA Margin: 17.1%, down from 19.8% in the same quarter last year
- Free Cash Flow Margin: 16.6%, down from 19.1% in the same quarter last year
- Organic Revenue fell 7.7% year on year (0.4% in the same quarter last year)
- Market Capitalization: $11.18 billion
“Third quarter results demonstrated the resilience of our business as benefits from our strategic initiatives, diligent cost management, and lower employee-related costs generated solid profitability and cash flow performance,” stated Steven B. Hedlund, President and Chief Executive Officer.
Company Overview
Headquartered in Ohio, Lincoln Electric (NASDAQ:LECO) manufactures and sells welding equipment for various industries.
Professional Tools and Equipment
Automation that increases efficiency and connected equipment that collects analyzable data have been trending, creating new demand. Some professional tools and equipment companies also provide software to accompany measurement or automated machinery, adding a stream of recurring revenues to their businesses. On the other hand, professional tools and equipment companies are at the whim of economic cycles. Consumer spending and interest rates, for example, can greatly impact the industrial production that drives demand for these companies’ offerings.
Sales Growth
Examining a company’s long-term performance can provide clues about its business quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Regrettably, Lincoln Electric’s sales grew at a mediocre 6.1% compounded annual growth rate over the last five years. This shows it couldn’t expand in any major way, a tough starting point for our analysis.
We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Lincoln Electric’s recent history shows its demand slowed as its annualized revenue growth of 4.9% over the last two years is below its five-year trend. 
We can dig further into the company’s sales dynamics by analyzing its organic revenue, which strips out one-time events like acquisitions and currency fluctuations because they don’t accurately reflect its fundamentals. Over the last two years, Lincoln Electric’s organic revenue averaged 1.5% year-on-year growth. Because this number is lower than its normal revenue growth, we can see that some mixture of acquisitions and foreign exchange rates boosted its headline performance. 
This quarter, Lincoln Electric reported a rather uninspiring 4.8% year-on-year revenue decline to $983.8 million of revenue, in line with Wall Street’s estimates.
Looking ahead, sell-side analysts expect revenue to grow 3% over the next 12 months, a slight deceleration versus the last two years. This projection is underwhelming and illustrates the market thinks its products and services will see some demand headwinds.
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Operating Margin
Lincoln Electric has been an optimally-run company over the last five years. It was one of the more profitable businesses in the industrials sector, boasting an average operating margin of 14.9%. This result isn’t too surprising as its gross margin gives it a favorable starting point.
Looking at the trend in its profitability, Lincoln Electric’s annual operating margin rose by 6 percentage points over the last five years, showing its efficiency has meaningfully improved.
In Q3, Lincoln Electric generated an operating profit margin of 14.8%, down 1.8 percentage points year on year. Since Lincoln Electric’s operating margin decreased more than its gross margin, we can assume it was recently less efficient because expenses such as marketing, R&D, and administrative overhead increased.
Earnings Per Share
Analyzing revenue trends tells us about a company’s historical growth, but the long-term change in its earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.
Lincoln Electric’s EPS grew at a remarkable 13.6% compounded annual growth rate over the last five years, higher than its 6.1% annualized revenue growth. This tells us the company became more profitable as it expanded.
Diving into Lincoln Electric’s quality of earnings can give us a better understanding of its performance. As we mentioned earlier, Lincoln Electric’s operating margin declined this quarter but expanded by 6 percentage points over the last five years. Its share count also shrank by 8%, and these factors together are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth. 
Like with revenue, we analyze EPS over a shorter period to see if we are missing a change in the business.
For Lincoln Electric, its two-year annual EPS growth of 7.5% was lower than its five-year trend. We hope its growth can accelerate in the future.In Q3, Lincoln Electric reported EPS at $2.14, down from $2.40 in the same quarter last year. Despite falling year on year, this print beat analysts’ estimates by 4.2%. Over the next 12 months, Wall Street expects Lincoln Electric’s full-year EPS of $9.16 to shrink by 1.2%.
Key Takeaways from Lincoln Electric’s Q3 Results
It was good to see Lincoln Electric beat analysts’ EPS expectations this quarter. On the other hand, its EBITDA and organic revenue fell short of Wall Street’s estimates. Overall, this was a softer quarter. The stock remained flat at $196.33 immediately after reporting.
Lincoln Electric’s latest earnings report disappointed. One quarter doesn’t define a company’s quality, so let’s explore whether the stock is a buy at the current price. We think that the latest quarter is only one piece of the longer-term business quality puzzle. Quality, when combined with valuation, can help determine if the stock is a buy. We cover that in our actionable full research report which you can read here, it’s free.
