Lincoln Electric (NasdaqGS:LECO) is expected to report earnings on Tuesday, April 18th before the market opens. The stock's valuation is becoming stretched as shares have appreciated over 50% within the last year and currently trade near an all-time high.
Finbox.io fair value data implies that the stock is approximately 25% overvalued. The estimate is calculated by applying Wall Street projections to eight separate valuation analyses as shown below. This compares to Wall Street's consensus price target of $79.50 implying nearly 10% downside.
<img src='http://res.cloudinary.com/finbox/image/upload/v1491948650/LECO_Fair_Value_Detail_kuieow.jpg' alt= ‘Lincoln Electric (LECO) Finbox.io Fair Value Chart’>
The manufacturer and reseller of welding and cutting products has beat its earnings (EPS) estimates three out of the last four quarters. This positive trend suggests that the stock should be trading near its high. However, this is a misleading statement when analyzing the company's true operating performance.
Lincoln Electric's revenue and EBITDA has generally declined over the last twelve quarters as shown in the chart below. In Q4'14, the company generated $122 million of EBITDA on $684 million of revenue. This is well above its Q4'16 EBITDA of $100 million on $564 million of revenue.
<img src='http://res.cloudinary.com/finbox/image/upload/v1491948650/LECO_Performance_cb8ky8.jpg' alt= ‘Lincoln Electric (LECO) Performance Chart’>
While financial performance has deteriorated, the stock has traded higher. Is it because Lincoln Electric is expected to outperform going forward?
Projected Performance vs Peers
Lincoln Electric's projected revenue and EBITDA growth is middle-of-the-road when compared to its publicly traded peer group: Crane Company (NYSE:CR), Colfax (NYSE:CFX), Kennametal (NYSE:KMT) and Illinois Tool Works (NYSE:ITW).
When applying Wall Street's consensus forecast for each company, Lincoln Electric's projected 5yr revenue CAGR of 3.3% is slightly above CR (3.1%), CFX (3.0%), KMT (2.0%) and below ITW (3.9%). Additionally, the company's projected 5yr EBITDA CAGR of 7.4% is only above ITW (5.5%) and below CR (18.4%) and CFX (12.8%).
<img src='http://res.cloudinary.com/finbox/image/upload/v1491948650/LECO_Proj_Performance_ffblgn.jpg' alt= ‘Lincoln Electric (LECO) Projected Performance Chart’>
Valuation Multiples vs Peers
Typically, higher growth stocks will trade at higher valuation multiples but this is not the case for Lincoln Electric. The company's projected growth is mediocre at best but trades at higher valuation multiples relative to its peers.
Lincoln Electric's forward EBITDA multiple of 14.8x is above all of the comparable companies: CR (9.3x), CFX (12.5x), KMT (13.2x) and ITW (13.6x). Furthermore, the company's forward P/E multiple of 25.2x is above CR (16.8x), CFX (24.4x) and ITW (21.4x) and only below KMT (28.5x).
<img src='http://res.cloudinary.com/finbox/image/upload/v1491948650/LECO_Peer_Multiples_x8rzpg.jpg' alt= ‘Lincoln Electric (LECO) Peer Valuation Multiples Chart’>
According to S&P's CapitalIQ, Lincoln Electric's forward EBITDA and forward P/E multiple has averaged 10.3x and 17.7x over the last 5 years, respectively. That's a 4.5x EBITDA multiple expansion and a 7.5 P/E multiple expansion! The company's valuation has stretched to an unreasonable level which is not supported by underlying earnings and is getting ready to snap.
Shares May See A Correction Soon
On April 8th, CFRA and S&P Global recommended that investors take profits and sell Lincoln Electric. The independent equity research firm gave the company its lowest fair value rank while suggesting the stock is 20% overvalued.
<img src='http://res.cloudinary.com/finbox/image/upload/v1491948650/LECO_S_P_Rating_jykwn3.jpg' alt= ‘Lincoln Electric (LECO) S&P Global Fair Value Chart’>
Finbox.io's valuation analyses imply that Lincoln Electric has even more downside purely on a fundamental basis. So what could be the catalyst that causes the stock to fall to a more reasonable level?
An earnings misstep might just do it. Value investors may want to stay clear of LECO before the company reports on Tuesday.
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Note this is not a buy or sell recommendation on any company mentioned.
photo credit: Andrew Rayel