RD's Picks

After missing the strong run in steel stocks and steel prices, I wanted to see if there might be a related play that hadn't participated. Steel producers have been on a roll with strong demand around the world leading to pricing power. Along with energy, agriculture and mining, steel seems to be one of the few things doing well in this market.

Consider what a company does with steel. They might cut it, drill it, mill it, bolt it, shape it, bend it, turn it or any of many operations to create a final product. But mostly, they weld it. And, as far as I know, the only publicly traded, pure play on welding equipment and consumables is Lincoln Electric (LECO). Comparing LECO to US Steel (X) and Arcelor Mittal (MT) on a one-year price chart shows the two steel companies up over 45% with LECO up less than 5%, so it hasn't participated in the steel run. I recognize LECO isn't in the steel business, but would expect the welding equipment business to be somewhat correlated to steel consumption.

The 23 April earnings call transcript paints a familiar picture for industrial companies, a mediocre US market and strong growth in the rest of the world. In his comments, CFO Vince Petrella stated, "..you will note that our sales were up 15% in the quarter with North America increasing 7% and sales recorded outside of North America up by 23%." However, even in the US some of the market segments are doing well. By region, roughly 60% of the quarter's sales came from North America, 25% from Europe and 15% from the other areas. LECO is continuing to expand operations in India and China.

Fundamentals are good. The market cap is about $3.3 billion. The company has about $133 million of debt and about $238 million in cash. Analyst estimates for '09 earnings are $5.76 a share, so at the 1 July close of $77.23, the stock is trading at 13.4 times '09 earnings. LECO pays a 25-cent quarterly dividend for a yield of about 1.3%. As of the quarterly conference call, they had 4.2 million shares authorized in their repurchase plan.

Zacks just initiated coverage with a tepid hold. Their '09 earnings estimate is a little lower than the consensus shown on Yahoo and Zacks correctly points out that LECO trades at a premium to other companies in the small tools and accessories industry. However, I'm not sure Zacks has accounted for the differences between LECO and other companies in its industry. Many of the other companies are levered to homebuilding or predominately operate in the US. With its global footprint and a business connected to strong steel demand, I believe LECO's premium is well deserved.

I had established a small position in LECO for SLO at $84/share, but sold on the Zack's coverage release. I'm gambling that their hold rating will pull the stock price down a bit and offer a better entry point.

Disclosure: No position in any company mentioned at time of posting.

ETA: After writing this, the 2 July market took LECO and the steel stocks for a big dive. I believe LECO's earnings story is still intact, but 'ol Mr. Market may offer up some more discounts as we find out how deep the bear is going to roar.

Comments: View Comments |  Wednesday July 2, 2008  |  Stocks: LECO,