Automation Efficiency And Acquisitions Will Reshape Future Operations

AN
AnalystLowTarget
AnalystLowTarget
Not Invested
Consensus Narrative from 9 Analysts
Published
22 Apr 25
Updated
22 Apr 25
AnalystLowTarget's Fair Value
US$195.41
24.8% overvalued intrinsic discount
22 Apr
US$243.84
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1Y
27.8%
7D
7.4%

Author's Valuation

US$195.4

24.8% overvalued intrinsic discount

AnalystLowTarget Fair Value

Key Takeaways

  • Efficiency improvements and acquisitions are expected to enhance margins and stabilize earnings, despite volumetric sales declines and low-single-digit growth projections.
  • Strategic focus on automation and working capital management could drive revenue growth and cash flow improvements, while OEM demand challenges temper short-term expectations.
  • Softer manufacturing and foreign exchange impacts, along with trade tariffs and competitive pressures, are challenging revenue growth and market share for Lincoln Electric Holdings.

Catalysts

About Lincoln Electric Holdings
    Through its subsidiaries, designs, develops, manufactures, and sells welding, cutting, and brazing products in the United States and internationally.
What are the underlying business or industry changes driving this perspective?
  • Lincoln Electric Holdings anticipates efficiency improvements, especially in automation and Harris Products Group, which are expected to enhance net margins through cost management and savings action up to $75 million annually once fully realized.
  • The company is focusing on organic growth in the automation sector, aiming to hit a $1 billion sales target by 2025, which highlights opportunities for revenue growth, despite a volumetric decline in sales in 2024.
  • Lincoln Electric is strategically pursuing acquisitions that could provide an added sales growth boost, expecting around a 2% increase in sales from 2024 acquisitions, potentially stabilizing earnings through increased market penetration.
  • The company plans improvements in working capital efficiency, targeting an operating working capital to sales ratio of 15% by 2025, which could positively impact cash flows and free-up resources for reinvestment.
  • Challenges with OEM demand and trade policies, including potential tariffs, contribute to a cautious outlook with low single-digit sales growth for 2025, which tempers expectations for significant net operating income growth or EPS improvement in the short term.

Lincoln Electric Holdings Earnings and Revenue Growth

Lincoln Electric Holdings Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?
  • This narrative explores a more pessimistic perspective on Lincoln Electric Holdings compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
  • The bearish analysts are assuming Lincoln Electric Holdings's revenue will grow by 1.3% annually over the next 3 years.
  • The bearish analysts assume that profit margins will increase from 11.6% today to 13.2% in 3 years time.
  • The bearish analysts expect earnings to reach $548.6 million (and earnings per share of $9.76) by about April 2028, up from $466.1 million today. The analysts are largely in agreement about this estimate.
  • In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 23.3x on those 2028 earnings, up from 21.3x today. This future PE is greater than the current PE for the US Machinery industry at 19.1x.
  • Analysts expect the number of shares outstanding to decline by 1.43% per year for the next 3 years.
  • To value all of this in today's terms, we will use a discount rate of 7.31%, as per the Simply Wall St company report.

Lincoln Electric Holdings Future Earnings Per Share Growth

Lincoln Electric Holdings Future Earnings Per Share Growth

Risks

What could happen that would invalidate this narrative?
  • The company is experiencing softer manufacturing activity across most end markets, predominantly driven by large OEMs who are curtailing production levels, impacting deferred capital spending, which could negatively affect revenue growth.
  • There are challenging prior year comparisons in automation sales and energy project activity across regions like Asia Pacific and the Middle East, which could hinder expected revenue growth.
  • The company anticipates foreign exchange rates to have a 150 basis point unfavorable impact on full-year net sales, potentially lowering revenue.
  • The outlook includes risks from pending trade tariffs, which if implemented, might require pricing actions and could suppress demand, affecting revenue and net margins.
  • The competitive dynamics show Lincoln's organic growth in Welding has lagged behind its biggest competitor over the last four quarters, potentially affecting market share and revenue.

Valuation

How have all the factors above been brought together to estimate a fair value?

  • The assumed bearish price target for Lincoln Electric Holdings is $195.41, which represents one standard deviation below the consensus price target of $224.56. This valuation is based on what can be assumed as the expectations of Lincoln Electric Holdings's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  • However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $255.0, and the most bearish reporting a price target of just $178.0.
  • In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $4.2 billion, earnings will come to $548.6 million, and it would be trading on a PE ratio of 23.3x, assuming you use a discount rate of 7.3%.
  • Given the current share price of $177.0, the bearish analyst price target of $195.41 is 9.4% higher.
  • We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.

How well do narratives help inform your perspective?

Disclaimer

AnalystLowTarget is a tool utilizing a Large Language Model (LLM) that ingests data on consensus price targets, forecasted revenue and earnings figures, as well as the transcripts of earnings calls to produce qualitative analysis. The narratives produced by AnalystLowTarget are general in nature and are based solely on analyst data and publicly-available material published by the respective companies. These scenarios are not indicative of the company's future performance and are exploratory in nature. Simply Wall St has no position in the company(s) mentioned. Simply Wall St may provide the securities issuer or related entities with website advertising services for a fee, on an arm's length basis. These relationships have no impact on the way we conduct our business, the content we host, or how our content is served to users. The price targets and estimates used are consensus data, and do not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that AnalystLowTarget's analysis may not factor in the latest price-sensitive company announcements or qualitative material.

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