Over the past six months, Lincoln Electric's shares (currently trading at $279.29) have posted a disappointing 6.6% loss, well below the S&P 500's 11.7% gain. This might have investors contemplating their next move.
Is there a buying opportunity in Lincoln Electric, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it's free.
Even though the stock has become cheaper, we're sitting this one out for now. Here are three reasons you should be careful with LECO, plus one stock we'd rather own.
Long-term growth is the most important, but within industrials, a stretched historical view may miss new industry trends or demand cycles. Lincoln Electric's recent performance shows its demand has slowed as its annualized revenue growth of 4.6% over the last two years was below its five-year trend. We're wary when companies in the sector see decelerations in revenue growth, as it could signal changing consumer tastes aided by low switching costs.
Investors interested in Professional Tools and Equipment companies should track organic revenue in addition to reported revenue. This metric gives visibility into Lincoln Electric's core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.
Over the last two years, Lincoln Electric's organic revenue averaged 1.3% year-on-year growth. This performance was underwhelming and suggests it may need to improve its products, pricing, or go-to-market strategy, which can add an extra layer of complexity to its operations.
We like to invest in businesses with high returns, but the trend in a company's ROIC can also be an early indicator of future business quality.
Over the last few years, Lincoln Electric's ROIC averaged 2.8 percentage point decreases each year. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Lincoln Electric isn't a terrible business, but it doesn't pass our quality test. Following the recent decline, the stock trades at 23.3× forward P/E (or $279.29 per share). This valuation is reasonable, but the company's shakier fundamentals present too much downside risk. We're fairly confident there are better stocks to buy right now. We'd suggest looking at one of our top software and edge computing picks.
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