Has Lincoln Electric Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Lincoln Electric (Nasdaq: LECO  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Lincoln Electric.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-year annual revenue growth > 15%

5.4%

Fail

 

1-year revenue growth > 12%

11.7%

Fail

Margins

Gross margin > 35%

29.7%

Fail

 

Net margin > 15%

8.8%

Fail

Balance sheet

Debt to equity < 50%

1.6%

Pass

 

Current ratio > 1.3

2.52

Pass

Opportunities

Return on equity > 15%

19.6%

Pass

Valuation

Normalized P/E < 20

17.69

Pass

Dividends

Current yield > 2%

1.4%

Fail

 

5-year dividend growth > 10%

9.1%

Fail

       
 

Total score

 

4 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Lincoln last year, its score has dropped by two points, as revenue and dividend growth both slowed. The stock, though, has rewarded shareholders amply, with a gain of nearly 30% over the past year.

Lincoln makes welding equipment, a simple-sounding business that's actually integral to construction activity around the world. With applications for everything from shipbuilding and pipeline construction to electrical generation, Lincoln helps its customers get their building jobs done.

For many, though, Lincoln's claim to fame has a longer-term element than just a year's worth of strong performance. Along with cabinet maker American Woodmark (Nasdaq: AMWD  ) and bearing maker Timken (NYSE: TKR  ) , Lincoln has remained committed to keeping its manufacturing base within the U.S., even when cheaper labor overseas might have added to its bottom line. Lincoln has been able to avoid mass layoffs for decades even during tough economic times, and the CEO has shared pay cuts with rank-and-file workers up and down the corporate ladder.

Of course, Lincoln faces competition. The company was engaged in litigation against Illinois Tool Works (NYSE: ITW  ) for years over patents related to portable welding machines. But this past April, the companies executed cross-licenses to resolve the dispute.

In its most recent quarter, Lincoln delivered extremely impressive numbers, posting a better than 20% rise in earnings per share despite having revenue contract slightly. With macroeconomic conditions as bad worldwide as they've been lately, those results were enough to cheer investors substantially. The company also recently boosted its dividend by 18%.

For Lincoln to improve, it needs to get revenue growing faster and to do its best to keep profits up. Better economic conditions could help it get closer to perfection in the future.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

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Click here to add Lincoln Electric to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 22, 2012, at 9:31 PM, mlate16 wrote:

    Yeah, that's the answer (move labor overseas). Lincoln has a reputation for building quality products here in the U.S. It already has manufacturing facilities worldwide.

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