ESAB Earnings: Automation Business Delivers Strong Revenue Growth

We’ve raised our fair value estimate for narrow-moat-rated ESAB ESAB to $74 from $70 after the company reported strong second-quarter results and raised its full-year outlook for the second time this year. The fair value estimate adjustment is driven by our higher near-term revenue growth and operating margin projections, as well as time value of money.

ESAB increased its second-quarter core sales by 6% from the prior-year period, with equal contribution from volume and pricing. In the Americas, price was up 7% and volume down 3% because of product-line simplification in order to focus on higher-margin and less-cyclical product lines. Excluding the impact of the product-line simplification, volumes were up by low-single digits in the Americas. In EMEA and APAC, price was flat while volumes grew 7%. We were encouraged by ESAB’s 200-basis-point year-over-year adjusted EBITDA margin expansion, from 16.6% to 18.6%, though that included a slight benefit from $2 million of growth investments being deferred into the third quarter.

Management raised its guidance range and now expects full-year core organic revenue growth of 4.0%-5.5% (up from 3.5%-5.5%), adjusted EBITDA of $450 million-$465 million (up from $430 million-$450 million), and adjusted EPS of $4.10-$4.30 (up from $3.85-$4.05). Looking beyond 2023, we remain optimistic about ESAB’s long-term prospects, including growth opportunities in gas control and automation. The gas control business has reached around $450 million in revenue and generates gross margins above 40%. The automation business delivered 23% year-over-year sales growth in the second quarter (including triple-digit growth in the cobot product line) and now accounts for roughly 10% of ESAB’s revenue. We expect the automation business to continue to benefit from favorable secular trends, including reshoring and a shortage of skilled welders.