Description

Lincoln Electric is a highly cyclical buisness:

• Lincoln Electric's revenues are cyclical: revenues declined -25% in COVID, -15% in the 2015/2016 commodity bust, -35% in the financial crisis and -10% in the dot com bust
• Lincoln Electric's margins are cyclical: EBITDA margins declined -250bps in COVID, -300bps in the 2015/2016 commodity bust, -1,100 bps in the financial crisis and -1,000 bps in the dot com bust
• Lincoln Electric is exposed to short-cycle demand: 58% of revenue is "consumables" (i.e., metal products consumed in the process of welding) and 42% of revenue is welding equipment used in industrial end markets

There is risk to Lincoln Electric's 2023E volumes:

• Specifically: there appears to be -$40mm of risk from volumes in 2023E; I scope a -2% volume decline versus consensus +4% volume growth in 2023E
• I scope flat volumes in the US (57% of revenue): Lincoln Electric's US welding demand is largely driven by US industrial production
• I scope -3% to -5% volume decline in International (29% of revenue): Lincoln Electric's International welding demand is largely driven by European industrial production
• I scope -5% to -7%volume decline in "Harris" (14% of revenue): Harris is Lincoln Electric's soldering and brazing business and includes products sold at retailers such as Home Depot and Lowe's. Harris' soldering and brazing demand is driven largely by residential HVAC demand

There is risk to Lincoln Electric's 2023E pricing:

• Specifically: there appears to be -$40mm of risk from pricing in 2023E; I scope a -2% pricing decline versus consensus +1% pricing growth in 2023E
• I scope -1% to -3% pricing in the US (57% of revenue): Lincoln Electric's US welding pricing is larely driven by steel prices, which are down -44% YTD
• I scope -1% to -3% pricing decline in International (29% of revenue): Lincoln Electric's International welding pricing is largely driven by steel prices, which are down -44% YTD
• I scope -3% to -5% pricing decline in "Harris" (14% of revenue): Harris' pricing is largely driven by silver and copper prices (as these are key consumable metals used in soldering and brazing); silver and copper are each down ~25% YTD

Currencies will be an additional drag:

• There is an additional -$40mm risk from currencies, which will be a -3% drag on 2023E revenue versus consensus <-1% drag. ~30% of business is conducted in foreign currency (largely Euros)

Taken together:

• I bridge to -$120mm, or -15%, risk to consensus 2023E EBITDA estimates for the Company. Importantly, these estimates do not contemplate a full-blown recession, but rather are reflective of US and European industrial production assumptions that approximate street estimates

The stock does not appear to be fully discounting the above cyclical risks

• The stock has sold off significantly less than peers: Lincoln Electric is down -10% YTD, vs. peer ITW, ESAB, and Kennametal down -26%, -33% and -41%, respectively
• With earnings double pre-COVID levels, the multiple is only slightly below its pre-COVID average. The stock is trading at 15x consensus 2023E EPS versus its long-term average multiple of 18x. Similarly, the stock is trading at 11x consensus 2023E EBITDA vs. its long-term average of 12x

Catalyst

• 2023E earnings missing consensus estimates