Lincoln Electric’s 20.8% return over the past six months has outpaced the S&P 500 by 10.7%, and its stock price has climbed to $263.63 per share. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.

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Why Is Lincoln Electric Not Exciting?

Despite the momentum, we're sitting this one out for now. Here are three reasons why LECO doesn't excite us and a stock we'd rather own.

1. Core Business Falling Behind as Demand Declines

Investors interested in Professional Tools and Equipment companies should track organic revenue in addition to reported revenue. This metric gives visibility into Lincoln Electric’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.

Over the last two years, Lincoln Electric’s organic revenue averaged 2% year-on-year declines. This performance was underwhelming and implies it may need to improve its products, pricing, or go-to-market strategy. It also suggests Lincoln Electric might have to lean into acquisitions to grow, which isn’t ideal because M&A can be expensive and risky (integrations often disrupt focus).

2. Recent EPS Growth Below Our Standards

While long-term earnings trends give us the big picture, we also track EPS over a shorter period because it can provide insight into an emerging theme or development for the business.

Lincoln Electric’s EPS grew at an unimpressive 4.9% compounded annual growth rate over the last two years. On the bright side, this performance was higher than its 1.4% annualized revenue growth and tells us the company became more profitable on a per-share basis as it expanded.

3. New Investments Fail to Bear Fruit as ROIC Declines

A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Lincoln Electric’s ROIC averaged 2.4 percentage point decreases each year. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Final Judgment

Lincoln Electric isn’t a terrible business, but it isn’t one of our picks. With its shares topping the market in recent months, the stock trades at 25× forward P/E (or $263.63 per share). This valuation multiple is fair, but we don’t have much faith in the company. We're pretty confident there are more exciting stocks to buy at the moment. We’d suggest looking at our favorite semiconductor picks and shovels play.

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