Lincoln Electric Bets On Cost Management Amid Weak Demand

On Mar 6, we issued an updated research report on Lincoln Electric Holdings Inc. (NASDAQ:LECO) . Focus on acquisitions, innovative product launches and execution of the 2020 vision and strategy will drive Lincoln Electric’s growth. However, impact of the slowdown in industrial production, weak automotive sector and the coronavirus outbreak is likely to impact results in the near term. We believe Lincoln Electric’s cost management actions will help sustain margins in this backdrop.

Weak Q4 Results on Low Demand

Lincoln Electric Holdings reported fourth-quarter 2019 adjusted earnings of $1.15 per share, reflecting a decline of 11% year over year. While reduction in global industrial production rates across most of the end sectors impacted demand for consumables, slowdown in capital spending and project deferrals reduced orders for automated systems.

Weak End Markets, Corona to Dent Results This Year

Lincoln Electric like other industrial stocks Terex Corporation (NYSE:TEX) , Caterpillar Inc. (NYSE:CAT) is bearing the brunt of the overall slowdown in industrial production. Volumes in the Americas Welding segment continue to remain challenged thanks to the overall slowdown in industrial production and lower capital spending for automation systems. In the International Welding segment, volumes continue to be impacted by declines in Asia Pacific and Europe, and lower global industrial production.

Pricing in the Americas Welding segment declined 1.2% and 1.7% in third-quarter and fourth-quarter 2019, respectively, reflecting the removal of surcharges in the U.S. business. The company anticipates pricing to be lower in the first half of 2020.

The impact of the coronavirus outbreak also remains a concern. Factory closures in China might impact Lincoln Electric’s results in the ongoing quarter. The company also stands the risk of supply chain disruptions. Further, it is also weighing on customer confidence and might impact customer orders.

Cost Management to Buoy Margins

The company is focusing on cost management which includes lower work hours, less overtime, suspension of new hiring and cutting down discretionary spending. The company is now planning to freeze senior management wages. Lincoln Electric expects $15-$18 million of annualized cost savings. This will start from second-quarter 2020 and major part of it will be realized in the back half of 2020.

Innovation, Acquisitions Remain Growth Drivers

Lincoln Electric’s product launches in the automation solutions market are likely to aid growth. The company is also preparing for the launch of its new additive services business, which will position it as a manufacturer of large scale 3D-printed metal spell parts, prototypes and tooling for industrial customers. This is likely to present ample prospects. It also continues to invest in long-term strategy for automation in support of its 2020 strategy initiatives.

The company launched its new state-of-the-art advanced technology solution center in Germany, which gives it an unprecedented commercial presence in the European market. This tech center will enable the company to showcase its latest technologies and welding consumables, equipment and automation.

In January 2019, Lincoln Electric acquired the soldering business of Worthington Industries, Inc. (NYSE:WOR) . This broadened the Harris Products Group’s portfolio of industry-leading consumables with the addition of premium solders and fluxes. In April 2019, Lincoln Electric acquired Baker Industries to expand automation and additive strategies. Recently, the company acquired an controlling interest in Askaynak, a leading Turkish producer of welding consumables and equipment. The buyout advances the company's regional growth strategy in Europe, the Middle East and Africa.

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