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Welding equipment manufacturer Lincoln Electric (NASDAQGS:LECO) reported results in line with analysts' expectations in Q2 CY2024, with revenue down 3.7% year on year to $1.02 billion. It made a non-GAAP profit of $2.34 per share, down from its profit of $2.44 per share in the same quarter last year.
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Lincoln Electric (LECO) Q2 CY2024 Highlights:
- Revenue: $1.02 billion vs analyst estimates of $1.02 billion (small beat)
- EPS (non-GAAP): $2.34 vs analyst estimates of $2.29 (2.1% beat)
- Gross Margin (GAAP): 37.6%, up from 35.5% in the same quarter last year
- Free Cash Flow of $147.5 million, up 37.7% from the previous quarter
- Organic Revenue fell 4.4% year on year (4.4% in the same quarter last year)
- Market Capitalization: $12.03 billion
Headquartered in Ohio, Lincoln Electric (NASDAQGS:LECO) manufactures and sells welding equipment for various industries.
Professional Tools and EquipmentAutomation that increases efficiency and connected equipment that collects analyzable data have been trending, creating new demand. Some professional tools and equipment companies also provide software to accompany measurement or automated machinery, adding a stream of recurring revenues to their businesses. On the other hand, professional tools and equipment companies are at the whim of economic cycles. Consumer spending and interest rates, for example, can greatly impact the industrial production that drives demand for these companies’ offerings.
Sales GrowthExamining a company's long-term performance can provide clues about its business quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Regrettably, Lincoln Electric's sales grew at a mediocre 6.3% compounded annual growth rate over the last five years. This shows it couldn't expand in any major way and is a tough starting point for our analysis.
Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Lincoln Electric's annualized revenue growth of 7.5% over the last two years is above its five-year trend, but we were still disappointed by the results.
We can better understand the company's sales dynamics by analyzing its organic revenue, which strips out one-time events like acquisitions and currency fluctuations because they don't accurately reflect its fundamentals. Over the last two years, Lincoln Electric's organic revenue averaged 5.1% year-on-year growth. Because this number is lower than its normal revenue growth, we can see that some mixture of acquisitions and foreign exchange rates boosted its headline performance.
This quarter, Lincoln Electric reported a rather uninspiring 3.7% year-on-year revenue decline to $1.02 billion of revenue, in line with Wall Street's estimates. Looking ahead, Wall Street expects revenue to remain flat over the next 12 months.
Operating Margin Lincoln Electric has been an optimally-run company over the last five years. It was one of the more profitable businesses in the industrials sector, boasting an average operating margin of 14.8%. This result isn't too surprising as its gross margin gives it a favorable starting point.
Looking at the trend in its profitability, Lincoln Electric's annual operating margin rose by 6.3 percentage points over the last five years, showing its efficiency has meaningfully improved.
In Q2, Lincoln Electric generated an operating profit margin of 14.6%, down 2.2 percentage points year on year. Conversely, the company's gross margin actually rose, so we can assume its recent inefficiencies were driven by increased operating expenses like sales, marketing, R&D, and administrative overhead.
EPSWe track the long-term growth in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company's growth was profitable.
Lincoln Electric's EPS grew at a remarkable 13.7% compounded annual growth rate over the last five years, higher than its 6.3% annualized revenue growth. This tells us the company became more profitable as it expanded.
Diving into the nuances of Lincoln Electric's earnings can give us a better understanding of its performance. As we mentioned earlier, Lincoln Electric's operating margin declined this quarter but expanded by 6.3 percentage points over the last five years. Its share count also shrank by 8.9%, and these factors together are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.
Like with revenue, we also analyze EPS over a shorter period to see if we are missing a change in the business. For Lincoln Electric, its two-year annual EPS growth of 12.4% was lower than its five-year trend. We still think its growth was good and hope it can accelerate in the future.
In Q2, Lincoln Electric reported EPS at $2.34, down from $2.44 in the same quarter last year. Despite falling year on year, this print beat analysts' estimates by 2.1%. Over the next 12 months, Wall Street expects Lincoln Electric to perform poorly. Analysts are projecting its EPS of $9.42 in the last year to shrink by 1.6% to $9.27.
Key Takeaways from Lincoln Electric's Q2 Results It was good to see Lincoln Electric slightly beat analysts' revenue and EPS expectations this quarter. On the other hand, its organic revenue missed. Overall, this was a decent quarter for Lincoln Electric. The stock remained flat at $211 immediately after reporting.
