Presented by
Robert Eberhard, Rob Jannusch and Rodrigo Serna
April 1st, 2014
Source: Lincoln Electric Company History
Source: Company 10-K
Macroeconomic Analysis - Welding
• Manufacturing numbers expected to rise in 2014
• Global market for welding expected to grow substantially through 2018 due to
continuous growth of automobile and construction industries and use of welding
products in wide range of industries including homebuilding, bridges, ships, pipelines,
submarines, tanks, etc.
• Emerging economies like Brazil, China, India and Russia will drive demand for
welding products
• Robot welding segment expected to experience highest rate of growth
Source: Transparency Market Research Report for Welding Products Market: 2012-2018 Global Industry Analysis
Macroeconomic Analysis - Global
• UNIDO Statistics presents this report on
world manufacturing production growth
quarterly based on indices of
industrial production
• World manufacturing gained further strength
in the 4th quarter of 2013 as a result of the
continuing economic recovery of
industrialized countries
• Manufacturing output grew in all
industrialized country groups for the first
time since 2010
• The manufacturing output of the U.S., the
largest manufacturer in the world, grew
by 3.0%
Source: United Nations Industrial Development Organization World Manufacturing Production Quarterly Report, Quarter IV 2013
Macroeconomic Analysis
• Institute for Supply Management Report on Business shows
economic activity in the manufacturing sector expanded in
February for the 9th consecutive month and in the overall
economy for 57th consecutive month
MANUFACTURING AT A GLANCE
FEBRUARY 2014
Index
Series
Index
Feb
Series
Index
Jan
Percentage
Point
Change
Direction
Rate
of
Change
Trend*
(Months)
PMI®
53.2
51.3
+1.9
Growing
Faster
9
New Orders
54.5
51.2
+3.3
Growing
Faster
9
Production
48.2
54.8
-6.6
Contracting
From
Growing
1
Employment
52.3
52.3
0.0
Growing
Same
8
• Manufacturing expanded in February as the PMI registered
53.2%, an increase of 1.9 points over January’s 51.3%
Supplier
Deliveries
58.5
54.3
+4.2
Slowing
Faster
9
Inventories
52.5
44.0
+8.5
Growing
From
Contracting
1
• Reading above 50% indicates that manufacturing economy is
generally expanding; below 50% contracting
Customers'
Inventories
46.5
44.0
+2.5
Too Low
Slower
27
Prices
60.0
60.5
-0.5
Increasing
Slower
7
Backlog of
Orders
52.0
48.0
+4.0
Growing
From
Contracting
1
Exports
53.5
54.5
-1.0
Growing
Slower
15
Imports
53.5
53.5
0.0
Growing
Same
13
OVERALL ECONOMY
Growing
Faster
57
Manufacturing Sector
Growing
Faster
9
• Of the 18 manufacturing industries, 14 are reporting growth in
February
• PMI in excess of 43.2 over a period of time indicates an
expansion of the overall economy
Source: ISM February 2014 Manufacturing ISM Report on Business:
March 3, 2014
Macroeconomic Analysis
• Manufacturing numbers expected to rise in 2014, according to
Manufacturers Alliance for Productivity and Innovation
• Survey’s composite index improved from 66 to 67, highest level
since 2012
• 17 straight quarters of index reading over 50, which is dividing
line for growth in the manufacturing sector
• Capacity utilization index, which measures % of firms operating
above 85% of capacity, was only index to drop
• U.S. manufacturers showed a preference for capital investment
at home as opposed to internationally
Source: Industry Week, January 16, 2014
SWOT Analysis
Strengths
•
•
•
•
Unique business model ; 8 HBS cases written about it
Employee incentive system and guaranteed work
Extensive Research & Development program
Superior customer service
Weaknesses
•
•
•
•
Opportunities
•
•
•
Poised to benefit from continued growth in China, India,
Brazil, and in other developed economies
Emplaced in industries
Successful acquisition track record
Lack of production in some international markets
Difference of opinion between domestic and international
managers and labor
Voltage level issues with products in Japan
Distribution network allowed to sell other products in addition
to the sale of Lincoln Electric products
Threats
•
•
•
•
Imitation of products internationally
Brand awareness internationally
Continued liability from asbestos lawsuits
Competitive market in acquisitions could limit impact of future
acquisitions
Spark by Frank Koller (2012)
• Canadian economics journalist Frank Koller explored Lincoln
Electric in his book Spark, focusing primarily on the
company’s unique employee incentive program.
• A seminal case study by Harvard Business School in 1975
remains the school’s best-selling case study.
• An interesting read that highlights just how job security and
employee investment in a company’s mission can inspire
economic growth and the success of the company.
Source: Company 10-K
Share Price
Terminal value
Discounted Cash Flow Analysis
3,768,725
Enterprise value
4,863,758
Total Shares Outstanding
81,010,084
($ in thousands except per share data)
Implied share price
2015
2016
2017
2018
Earnings before interest and taxes
$482,845
$558,678
$605,681
$654,135
$729,840
Taxes
(144,854)
(167,604)
(181,704)
(196,241)
(218,952)
76,731
85,938
96,251
103,951
112,267
(110,773)
(73,809)
(82,666)
(61,724)
(66,662)
Minus capital expenditure
(80,252)
(89,882)
(100,668)
(108,721)
(117,419)
Free cash flow
223,697
313,323
336,894
391,401
439,075
Present value of free cash flow
194,519
236,917
221,514
223,785
218,298
Depreciation and amortization
Minus change in net working capital
WACC
15%
Terminal growth rate
3%
Corporate Tax Rate
30%
Sensitivity Analysis
WACC
Terminal Growth
2014
$60.04
$60.04
12.0%
13.5%
15.0%
16.5%
18.5%
2.0%
69.94
62.14
56.04
51.13
45.86
2.5%
73.13
64.57
57.96
52.68
47.08
3.0%
76.68
67.24
60.04
54.35
48.37
3.5%
80.65
70.17
62.30
56.15
49.75
4.0%
85.11
73.40
64.76
58.09
51.23
Capitalization
Debt
30,790
2.0%
Equity
1,530,688
98.0%
Total
1,561,478
100.0%
WACC
Beta
4 Year
1.42
Risk Free Rate
2.73%
2 Year
1.35
Market Return
17.5%
1 Year
1.36
Market Risk Premium
14.8%
Half Year
1.29
LECO LTM Return
31.9%
One Month
1.04
Adj. Beta
1.30
Cost of Debt
11.4%
Cost of Equity
22.0%
WACC
21.7%
Adj. WACC
15.0%
Target Company
Lincoln Electric Corp.
Ticker Symbol
Price
Shares (millions)
Equity Value
Enterprise Value
P/B Value
TEV/Sales
TEV/EBITDA
P/E
LECO
$72.01
81.98
$5,903
$5,520
18.84x
1.85x
10.88x
18.36x
Illinois Tool Works
ITW
$81.33
446.20
36,289
37,287
22.55
2.51
12.34
18.06
Kennametal Inc.
KMT
$44.30
78.77
3,489
4,496
23.82
1.47
11.18
14.34
Rofin-Sinar Technologies RSTI
$23.96
28.20
676
553
19.51
1.01
10.02
24.63
Hardinge
HDNG
$14.40
11.80
170
172
16.42
0.53
6.00
18.58
Roper industries
ROP
$133.51
99.12
13,234
15,296
42.42
4.34
14.78
21.41
High
42.42
4.34
14.78
24.63
Median
22.55
1.47
11.18
18.58
Low
16.42
0.53
6.00
14.34
Mean
24.95
1.97
10.86
19.41
Comparable Companies
Comparable Statistics
Multiple
Price/Book Value
Forward TEV/Sales
Forward TEV/EBITDA
Forward P/E
Implied Stock Price
Weight
25%
25%
25%
25%
Implied Price
86.18
53.05
68.82
72.89
$70.23
Watch List