Legacy Welding Reliance Will Strain Future Margins Despite Modest Automation

Key Takeaways

• Heavy reliance on traditional welding and slow expansion into innovative technologies exposes Lincoln Electric to cyclical downturns and long-term structural risks.
  
• Regulatory pressures, industry automation shifts, and supply chain disruptions threaten margins and earnings unless adaptation accelerates across products and operations.
  
• Expansion in automation, successful acquisitions, and focus on innovation position the company for higher margins, resilient earnings, and reduced cyclicality amid shifting manufacturing trends.

Catalysts

Through its subsidiaries, designs, develops, manufactures, and sells welding, cutting, and brazing products in the United States and internationally.

• Despite positive pricing actions, Lincoln Electric's core business remains highly dependent on traditional welding equipment for sectors like oil and gas, construction, and shipbuilding that are vulnerable to downturns and shifting global capital expenditure cycles. This leaves revenues exposed to cyclical slowdowns, eroding top-line growth and increasing volatility.
  
• As manufacturing becomes more automated with the acceleration of robotics, artificial intelligence, and alternative joining technologies, demand is expected to increasingly shift away from conventional arc welding solutions. Lincoln Electric's slower penetration into high-growth adjacent areas, such as additive manufacturing and laser
• or adhesive-based joining, poses a structural risk of long-term revenue stagnation and margin compression due to loss of relevance.
  
• Ongoing global moves toward stricter emissions regulations and low-carbon manufacturing are set to add compliance costs and could reduce demand from sectors reliant on traditional welding methods. This dynamic threatens both gross and operating margins as Lincoln Electric must invest heavily to adapt its legacy product portfolio to new environmental standards without a guaranteed return.
  
• The industry is facing persistent skilled labor shortages, but the company's strategy is heavily reliant on driving automation adoption among industrial customers. If alternative automation providers or disruptive technologies succeed in providing easier-to-use, integrated platforms at lower cost, Lincoln Electric's investments in robotics and automation could see suboptimal returns, pressuring net margins and long-term earnings growth.
  
• Rising global trade barriers, protectionism, and recurring supply chain disruptions-especially in critical input metals like steel and aluminum-risk increasing input costs, affecting Lincoln Electric's ability to maintain price/cost neutrality. Sustained cost inflation without commensurate pricing power would directly impact gross profit and operating income, undermining confidence in future earnings quality.

Lincoln Electric Holdings Future Earnings and Revenue Growth

Assumptions

• 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 3.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 12.3% today to 14.5% in 3 years time.
• The bearish analysts expect earnings to reach $660.8 million (and earnings per share of $12.16) by about August 2028, up from $502.9 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 18.1x on those 2028 earnings, down from 26.3x today. This future PE is lower than the current PE for the US Machinery industry at 23.3x.
• Analysts expect the number of shares outstanding to decline by 2.63% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.15%, as per the Simply Wall St company report.

Lincoln Electric Holdings Future Earnings Per Share Growth

Risks

• The company is benefiting from resilient demand in core end markets such as general industrials, energy, and HVAC, supported by strong quoting activity and backlog in automation and steady organic sales growth, which could drive future revenue and earnings growth if these trends continue.
  
• Long-term secular shifts like reshoring and infrastructure investment, particularly in North America, are expected to prompt increased capital spending in manufacturing and fabrication, positioning Lincoln Electric to capture higher sales and margin expansion from domestic customers.
  
• Expansion into automation, robotics, and the acquisition of Alloy Steel are broadening the company's technological offerings and end-market reach, enabling structural margin improvements and incremental earnings contributions from accretive acquisitions.
  
• Persistent focus on cost management, operational efficiency, and successful price/cost management has preserved or improved gross and operating margins during challenging periods, signaling the potential for elevated profitability if volumes recover.
  
• Product innovation and increased penetration into high-margin, recurring revenue streams such as consumables, software solutions, and additive manufacturing provide opportunities for sustainable earnings growth and reduced cyclicality in future financial results.

Valuation

• The assumed bearish price target for Lincoln Electric Holdings is $189.0, which represents the lowest price target estimate amongst analysts. 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 $290.0, and the most bearish reporting a price target of just $189.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $4.6 billion, earnings will come to $660.8 million, and it would be trading on a PE ratio of 18.1x, assuming you use a discount rate of 8.2%.
  
• Given the current share price of $239.47, the bearish analyst price target of $189.0 is 26.7% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.