Lincoln Electric has had an impressive run over the past six months as its shares have beaten the S&P 500 by 7.6%. The stock now trades at $259.96, marking a 10% gain. This performance may have investors wondering how to approach the situation.

Is there a buying opportunity in Lincoln Electric, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.

Why Is Lincoln Electric Not Exciting?

Despite the momentum, we don't have much confidence in Lincoln Electric. Here are three reasons we avoid LECO 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 2.3% 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

Although long-term earnings trends give us the big picture, we like to analyze EPS over a shorter period to see if we are missing a change in the business.

Lincoln Electric’s weak 2.4% annual EPS growth over the last two years aligns with its revenue trend. This tells us it maintained its per-share profitability as it expanded.

3. New Investments Fail to Bear Fruit as ROIC Declines

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. Unfortunately, Lincoln Electric’s ROIC averaged 3.4 percentage point decreases each year over the last few years. 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’s business quality ultimately falls short of our standards. With its shares topping the market in recent months, the stock trades at 24.7× forward P/E (or $259.96 per share). Investors with a higher risk tolerance might like the company, but we think the potential downside is too great. We're pretty confident there are superior stocks to buy right now. Let us point you toward the Amazon and PayPal of Latin America.

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