Why Is Lincoln Electric (LECO) Down 18.2% Since Last Earnings Report?

It has been about a month since the last earnings report for Lincoln Electric Holdings (LECO). Shares have lost about 18.2% in that time frame, outperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Lincoln Electric due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Lincoln Electric Q4 Earnings Top, Sales Lag Estimates

Lincoln Electric Holdings reported fourth-quarter 2019 adjusted earnings of $1.15 per share, which beat the Zacks Consensus Estimate of $1.13. However, the reported figure declined 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. This impacted the company’s fourth-quarter top and bottom-line performance.

Including one-time items, the bottom line came in at $1.03 compared with $1.35 in the prior-year quarter.

Total revenues declined 1% year over year to $736 million as a decrease of 6.5% in organic sales offset a gain of 5.9% from acquisitions. The top line missed the Zacks Consensus Estimate of $737 million.

Costs and Margins

Cost of goods sold was up 0.4% to $495 million from $494 million in the prior-year quarter. Gross profit declined 4% to $241 million from the prior-year quarter figure of $250 million. Gross margin came in at 32.7% compared with the prior-year quarter figure of 33.7%.

Selling, general and administrative expenses declined 3% year over year to $149 million from the prior-year quarter. Adjusted operating profit declined 5% year over year to $91.6 million in the quarter. Operating margin came in at 12.4% compared with 13.0% in the year-ago quarter.

Financial Update

Lincoln Electric had cash and cash equivalents of around $200 million at the end of 2019 compared with $359 million at the end of the 2018. The company reported record cash flow from operations of $403 million during 2019 compared with $329 million in the prior year.

During 2019, Lincoln Electric returned $411 million to shareholders through dividend and share repurchases. The company’s board of director's approved a new share repurchase program authorizing the company to repurchase up to 10 million of its outstanding common stock. This current authorization is in addition to the 2.8 million shares remaining from the prior program.
The board of directors recently declared an increase of 4.3% in the quarterly dividend to 49 cents per share. The dividend will be paid out on Jan 15, 2020 to shareholders of record as of Dec 31, 2019.

2019 Results

Lincoln Electric reported adjusted earnings per share of $4.70 in 2019, down 2% from the prior year. The bottom line beat the Zacks Consensus Estimate of $4.68. On a reported basis, including one-time items, earnings per share came in at $4.68 compared with $4.37 in 2018.
Sales dipped 0.8% year over year to $3,003 million in 2019. The top-line figure also missed the Zacks Consensus Estimate of $3,004 million.

Outlook

The company is focusing on cost management to sustain margins in the backdrop of the weak of the broader deceleration in global industrial production. The initiatives include lower work hours, less overtime, suspending new hiring and cutting down discretionary spending. It is also implementing additional cost actions across the platform to achieve greater productivity. These actions are expected to contribute approximately $15 million to $18 million of annualized cost savings beginning in second-quarter 2020. Major portion of the benefits is expected to be realized in the back half of the year.

Given the deceleration in fourth quarter sales and the ongoing trend in January, the company expects top line and earnings growth to be impacted in the first half of the year. Lincoln Electric also anticipates headwinds from rising expected incentive compensation and projected higher tax rate in 2020 to impact earnings.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision. The consensus estimate has shifted -8.89% due to these changes.

VGM Scores

At this time, Lincoln Electric has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. Notably, Lincoln Electric has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.