Lincoln Electric Earnings: Solid Operating Margin Expansion in Q3

We’ve raised our fair value estimate for narrow-moat-rated Lincoln Electric LECO to $179 from $171 after the company posted solid third-quarter earnings. Record adjusted operating margins helped drive a roughly 18% year-over-year increase in adjusted EPS, from $2.04 to $2.40. The fair value estimate increase reflects our slightly more optimistic operating margin projections as well as time value of money.

Third-quarter organic sales were up 0.4% from the same period last year, as 1.1% higher pricing more than offset a 0.7% volume decline, though we note that fewer shipping days in the quarter had an unfavorable 230-basis-point impact on volumes. While volumes increased by 0.4% in Americas welding and 2.9% in international welding, they fell by 11.2% in the Harris Products Group as the segment faced tough year-over-year comparisons. Lincoln Electric faced a mixed end market environment, as organic sales were up by midteens in energy, up mid- to high-single-digits in heavy industries, and up low-single digits in general industries, but down mid- to-high-single-digits in construction and infrastructure and down midteens in automotive. Lincoln Electric delivered a 130-basis-point adjusted operating margin expansion, from 16.4% to 17.7%, driven primarily by cost management.

Management updated its full-year guidance and now expects organic sales growth in the midsingle digits (at the low end of the previous mid- to high-single-digits range) and incremental operating margins in the high teens (at the high end of the previous mid- to high-teens range). Lincoln Electric expects mid-single-digit organic sales growth in the fourth quarter, which reflects the firm’s strong automation backlog and healthy order rates in October.