Has the Market Pushed Up Lincoln Electric (LECO)'s Valuation Too Far?

Lincoln Electric may be overvalued with mixed growth prospects, but the 7 analysts following the company give it an average rating of buy. The analysts have set target prices ranging from $145.0 to $195.0 per share, for an average of $174.0. At today's price of $168.54, Lincoln Electric is trading -3.14% away from its average target price, suggesting there is an analyst consensus of some upside potential.

Lincoln Electric Holdings, Inc., through its subsidiaries, designs, develops, manufactures, and sells welding, cutting, and brazing products worldwide. Based in Cleveland, OH, the mid-cap Industrials company has 12,000 full time employees. Lincoln Electric has not offered a dividend during the last year.

Lincoln Electric has a trailing twelve month P/E ratio of 21.0, compared to an average of 20.49 for the Industrials sector. Based on its EPS guidance of 9.28, the company has a forward P/E ratio of 18.2. Based on the 14.7% compound average growth rate of Lincoln Electric's historical and projected earnings per share, the company's PEG ratio is 1.4. This EPS growth rate is likely not sustainable, so will substitute the broader market's 5-year projected EPS growth rate of 9.5%, which gives us a PEG ratio of 2.15. This suggests that these shares are overvalued.

Furthermore, Lincoln Electric is likely overvalued compared to its book value, since its P/B ratio of 9.4 is higher than the sector average of 3.78. The company's shares are currently trading 268.5% above their Graham number, implying that they are overvalued in terms of earnings and book value.

If analysts are giving the the company a decent rating despite its hefty price point, it could be related to its strong cash flows. Furthermore, Lincoln Electric has wide margins as you can see in the financial summary below.

2019-12-31 2020-12-31 2021-12-31 2022-12-31
Revenue (MM) $3,003 $2,655 $3,234 $3,761
Revenue Growth n/a -11.58% 21.8% 16.3%
Gross Margins 33.6% 32.8% 33.0% 34.0%
Gross Margins Growth n/a -2.38% 0.61% 3.03%
Operating Margins 12.9% 12.3% 14.6% 16.6%
Operating Margins Growth n/a -4.65% 18.7% 13.7%
Net Margins 9.76% 7.76% 8.55% 12.56%
Net Margins Growth n/a -20.49% 10.18% 46.9%
Earnings Per Share $4.68 $3.42 $4.6 $8.04
EPS Growth n/a -26.92% 34.5% 74.78%
Diluted Shares (MM) 63 60 60 58
Free Cash Flow (MM) $334 $292 $303 $312
FCF Growth n/a -12.41% 3.55% 2.97%
Capital Expenditures (MM) -$70 -$59 -$63 -$72
Net Debt / EBITDA 1.16 1.26 1.35 1.44
The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.