Presented by Robert Eberhard, Rob Jannusch and Rodrigo Serna April 1 st , 2014
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Transcript of Presented by Robert Eberhard, Rob Jannusch and Rodrigo Serna April 1 st , 2014
Presented byRobert Eberhard, Rob Jannusch and Rodrigo Serna
April 1st, 2014
About Lincoln Electric• Founded in 1895 by John C. Lincoln in Cleveland, selling electric
motors of his own design• First welding product produced in 1909• Employee Advisory Board established in 1915, which meets every
two weeks to this day• Employee stock ownership plan introduced in 1925, one of the
first in the country, and first annual Incentive Bonus paid in 1934• Hired women after many workers were drafted during WWII• Expansion during past 15 years driven primarily by acquisitions
Source: Lincoln Electric Company History
Products and Markets• Broad-line manufacturer of welding, cutting, and brazing products
• Welding products include: Arc welding power sources, wire feeding systems, robotic welding packages, fume extraction equipment
• Cutting products include: CNC plasma and oxy-fuel cutting systems and regulators and torches used in oxy-fuel welding, cutting, and brazing
• Brazing products are primarily the materials used in the welding process like soldering alloys
• Major end-uses for its products are pretty widespread:• General metal fabrication, power generation and processing, structural steel
construction, heavy equipment fabrication, shipbuilding, automotive, pipe mills and pipelines, and offshore oil and gas exploration
• Operate 48 manufacturing facilities, including operations and joint ventures in 19 countries
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 growthSource: 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
• Of the 18 manufacturing industries, 14 are reporting growth in February
• Manufacturing expanded in February as the PMI registered 53.2%, an increase of 1.9 points over January’s 51.3%
• Reading above 50% indicates that manufacturing economy is generally expanding; below 50% contracting
• PMI in excess of 43.2 over a period of time indicates an expansion of the overall economy
MANUFACTURING AT A GLANCEFEBRUARY 2014
Index
SeriesIndexFeb
SeriesIndexJan
PercentagePointChange
Direction
RateofChange
Trend*(Months)
PMI® 53.2 51.3 +1.9 Growing Faster 9New 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
Supplier Deliveries
58.5 54.3 +4.2 Slowing Faster 9
Inventories
52.5 44.0 +8.5 Growing From Contracti
ng
1
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 Contracti
ng
1
Exports 53.5 54.5 -1.0 Growing Slower 15Imports 53.5 53.5 0.0 Growing Same 13
OVERALL ECONOMY Growing Faster 57Manufacturing Sector Growing Faster 9
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 AnalysisStrengths Weaknesses
• Unique business model ; 8 HBS cases written about it
• Employee incentive system and guaranteed work
• Extensive Research & Development program
• Superior customer service
• 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
Opportunities Threats• Poised to benefit from continued growth in
China, India, Brazil, and in other developed economies
• Emplaced in industries• Successful acquisition track record
• Imitation of products internationally• Brand awareness internationally • Continued liability from asbestos lawsuits• Competitive market in acquisitions could limit
impact of future acquisitions
Lincoln Electric Vision
“We are a global manufacturer and the market leader of the highest quality welding, cutting, and joining products. Our enduring passion for the development and application of our technologies allows us to create complete solutions that make our customers more productive and successful. We will distinguish ourselves through an unwavering commitment to our employees and a relentless drive to maximize shareholder value.”
Employees Matter!• In 1934, James Lincoln raised profit-sharing bonus to at least 25% of base
wages and salary, which has remained in place for 80 years• Averaged roughly 70% since 1950, topping out around 120% in really successful
years• For 2013, the average bonus per employee was $33,029, which was 62% of base
wagesand salary
• Employees are guaranteed to have at least 32 hours of work a week, and the company has not had a layoff since
• 3-year mutual approval prior to gaining lifetime employment guarantee, which includes a promise by employees not to unionize
• Employees are invested in the future of the company on their own• As of December 2012, 35% of employee 401k funds are invested in company stock
Major Acquisitions• 1998 was the beginning of major growth through acquisition
• Uhrhan & Schwill of Essen, Germany – installer of pipe welder systems• AS Kaynak of Turkey – welding consumables manufacturer• Indalco of Canada – aluminum wire manufacturer
• 2000 – acquires C.I.F.E. Spa, Italian manufacturer of welding consumables • 2002 – expansion into Eastern Europe with purchase of Bester, S.A.• 2004 – acquires three welding companies in China• 2011 – Severstal acquisition gives Lincoln the leading market position in
Russia• Recent acquisitions have expanded on current holdings and technologies,
including two companies acquired in 2013 that focus on robotic welding systems
Subsidiaries & Affiliates
Spark by Frank Koller (2012)• Canadian economics journalist Frank Koller
explored Lincoln Electric in his book Spark, focusing primarily on the company’s unique employee incentive program.
• A seminal case study by Harvard Business School in 1975 remains the school’s best-selling case study.
• An interesting read that highlights just how job security and employee investment in a company’s mission can inspire economic growth and the success of the company.
Valuation – Overview
Source: Company 10-K
• Continued North American growth
• Increase in foreign sales growth through acquisition
• Comfortable managing acquisitions due to smart investments
• Solid historical performance
Valuation – DCF
Discounted Cash Flow Analysis($ in thousands except per share data)
2014 2015 2016 2017 2018Earnings 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)
Depreciation and amortization 76,731 85,938 96,251 103,951 112,267
Minus change in net working capital (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$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 51.23Term
inal
Gro
wth
WACC
Sensitivity Analysis
Terminal value 3,768,725
Enterprise value 4,863,758
Total Shares Outstanding 81,010,084
Implied share price $60.04
WACC 15%
Terminal growth rate 3%
Corporate Tax Rate 30%
Share Price
Valuation – WACC
4 Year 1.42
2 Year 1.35
1 Year 1.36
Half Year 1.29
One Month 1.04
Adj. Beta 1.30
BetaRisk Free Rate 2.73%
Market Return 17.5%
Market Risk Premium 14.8%
LECO LTM Return 31.9%
Cost of Debt 11.4%
Cost of Equity 22.0%
WACC 21.7%
Adj. WACC 15.0%
WACC
• Beta decreasing over time based on daily close prices
• Capitalization very concentrated in equity
• WACC adjusted down ~6% based on company track record
Debt 30,790 2.0%
Equity 1,530,688 98.0%
Total 1,561,478 100.0%
Capitalization
Valuation – CompsTarget Company Ticker Symbol Price Shares (millions) Equity Value Enterprise Value P/B Value TEV/Sales TEV/EBITDA P/ELincoln Electric Corp. LECO $72.01 81.98 $5,903 $5,520 18.84x 1.85x 10.88x 18.36x
Comparable CompaniesIllinois 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
Comparable Statistics 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
Multiple Weight Implied PricePrice/Book Value 25% 86.18 Forward TEV/Sales 25% 53.05 Forward TEV/EBITDA 25% 68.82 Forward P/E 25% 72.89 Implied Stock Price $70.23
Recommendation
Watch List• Strong company with lots of potential, though currently
overpriced• Candidate to be re-reviewed in the future