We Expect Lincoln Electric's $1 Billion Automation Platform to Drive Strong Revenue Growth

Equity Analyst

Krzysztof Smalec

Lincoln Electric is a manufacturer of welding, cutting, and brazing products, claiming leading market share globally. Alongside rivals ITW and ESAB, Lincoln Electric is one of the top three players offering a complete welding-solutions package, including equipment and consumables, which we think differentiates the firm from smaller competitors.

We believe Lincoln Electric has built a narrow moat around its business based primarily on intangible assets, including its brand name and reputation for reliability. Since it was founded in 1895, the firm has established one of the most trusted brands in the welding space and maintained its reputation for quality for over 100 years. Lincoln Electric has generated impressive returns on invested capital, averaging roughly 25% over the past decade, and with its moat sources intact, we believe the firm is well-positioned to continue delivering solid results.

Lincoln Electric employs a management system in its United States factories that allows it to adjust workers’ hours from as low as 30 hours a week to over 50 hours a week to match demand throughout the business cycle. This strategy helps mitigate cyclicality by allowing the firm to effectively shift a portion of its fixed costs into a variable cost to protect margins during a downcycle. Further, this management system allows the firm to avoid layoffs and thus retain valuable employees during a recession, which also helps maintain high quality and ramp up production during a recovery.

The company has grown its automation platform to over $1 billion in sales in 2024, one year ahead of management's 2025 target date. In our view, the automation business offers compelling revenue growth opportunities and has the potential to reinforce customer switching costs because automation solutions perform a mission-critical function and are integrated into a customer’s manufacturing process, which we believe can lead to relatively sticky customer relationships.

Business Strategy & Outlook

We believe Lincoln Electric, a leading global provider of welding solutions, has built a narrow moat based primarily on intangible assets and secondarily on customer switching costs. Founded in 1895, the firm has established a strong brand and maintained a reputation for quality for over a century. The company has consistently delivered lucrative returns on invested capital, averaging nearly 20% over the last 10 years, and with its business protected by a narrow moat, we believe Lincoln Electric is likely to continue outearning its cost of capital over the next decade.

We think Lincoln Electric’s moat rests primarily on intangible assets, including its reputation for quality, patent portfolio, and strong relationships with distributors. The company has one of the most trusted brands in the welding segment and enjoys leading market share in the industry. We believe brand loyalty is relatively high in welding, and customers tend to stick with one manufacturer. The top brands in the industry resonate with customers, who often refer to the equipment by a brand’s traditional color scheme (for example, red for Lincoln Electric and blue for ITW’s Miller brand), and welders tend to stay loyal to their preferred brand based on the equipment they trained on, familiarity with the product line, and customer service. Lincoln Electric capitalizes on this through its welding schools and training programs, which create exposure to the brand and drive brand loyalty among new professional welders.

Further, the company has a strong track record of innovation and new product introductions, and we believe the firm spends adequate funds on research and development (1.5% of sales on average over the last 10 years, compared with 1.5% for ITW and 1.0% for ESAB) to protect its competitive position. The firm’s investments in research and development continue to bear fruit as Lincoln Electric has a roughly 34% vitality index (the percentage of total revenue derived from new products launched within the last five years). Additionally, the company regularly engages in mergers and acquisitions to supplement its portfolio of offerings. For example, the recent acquisition of Baker Industries has enhanced Lincoln Electric’s capabilities in automation and additive solutions.

To a lesser extent, we also believe Lincoln Electric benefits from customer switching costs. Alongside rivals ITW and ESAB, Lincoln Electric is one of the top three global players that offer a complete welding solutions package, including equipment and consumables. We think this differentiates the company from smaller competitors that only offer either equipment or consumables, as some customers value Lincoln Electric’s one-stop-shop approach and comprehensive suite of welding solutions. Further, based on their experience and familiarity with their preferred brand’s equipment, we believe that welders tend to be reluctant to switch brands without the promise of a meaningful improvement in performance or reduction in cost. 

We also believe Lincoln Electric’s investments in automation and Internet of Things solutions will reinforce customer switching costs. Lincoln Electric seeks to differentiate itself by becoming an automation integrator in the welding space, whereas many of its rivals sell equipment to third-party integrators. While sales of traditional equipment and consumables are often one-off transactions, sales of automation solutions inherently involve tighter client relationships as the supplier will often collaborate with customers on highly engineered solutions that may be customized to their needs. As automation solutions are tightly integrated into the customer’s manufacturing process and perform a mission-critical function, we believe customers are reluctant to switch vendors given the potential cost of unscheduled downtime or possible modifications to the production line. Therefore, Lincoln Electric’s engineering capabilities and experience with welding and automation give the firm a competitive advantage in a niche market with relatively high technological barriers to entry. 

Further, we think new Internet of Things solutions, including digital capabilities that improve weld accuracy and control as well as data analytics, will enhance customer switching costs. For example, the firm’s CheckPoint software allows customers to monitor their welding operations, including real-time data on productivity and material consumption. By combining digital solutions with its equipment, we think Lincoln Electric will be able to offer an integrated package and thus create stickier customer relationships.

While we believe Lincoln Electric merits a narrow moat, the firm’s international welding business is not as strong as its Americas operations. We view the international segment as a no-moat business as its operating margins have averaged 4.6% over the last 10 years, significantly lagging the 17.7% average operating margins generated by the Americas welding segment. There are several reasons for this subpar performance. For one, the industry is substantially more fragmented in Europe and Lincoln Electric’s brand does not carry the same weight as in the U.S., where the firm has been an industry leader for over a century. Another factor is Lincoln Electric’s unique management system in its U.S. factories, which gives the company the flexibility to adjust workers' hours from as low as 30 hours a week to over 50 hours a week throughout the business cycle, and effectively converts a portion of the fixed cost into a variable cost. Although management is pursuing initiatives to drive operating margin expansion in international welding and we think the business has some moat forming potential in the long run, the segment’s returns are currently below the firm’s cost of capital and we believe the international welding business lacks an economic moat.

Narrow

Economic Moat

Lincoln Electric Hlds

Lincoln Electric Holdings, Inc. engages in the manufacture of arc welding equipment, consumable welding products and other welding and cutting products. Its welding products include arc welding power sources, wire feeding systems, robotic welding packages, fume extraction equipment, consumable electrodes and fluxes. The firm offers CNC plasma and oxy-fuel cutting systems, regulators and torches used in oxy-fuel welding, cutting and brazing. It operates through the following segments: Americas Welding, International Welding and The Harris Products Group. The Americas Welding segment includes welding operations in North and South America. The International Welding segment primarily includes welding operations in Europe, Africa, Asia, and Australia. The Harris Products Group includes the company's global cutting, soldering and brazing businesses as well as the retail business in the United States. The company was founded by John C. Lincoln and James F. Lincoln on December 05, 1895 and is headquartered in Cleveland, OH.

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Lincoln Electric Holdings, Inc. engages in the manufacture of arc welding equipment, consumable welding products, and other welding and cutting products. It operates through the following segments: Americas Welding, International Welding, and The Harris Products Group. The Americas Welding segment includes welding operations in North and South America. The International Welding segment primarily deals with welding operations in Europe, Africa, Asia, and Australia. The Harris Products Group segment refers to the company's global cutting, soldering, and brazing businesses as well as the retail business in the United States. The company was founded by John C. Lincoln and James F. Lincoln on December 5, 1895 and is headquartered in Cleveland, OH.

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