Lincoln Electric (NASDAQ: LECO ) is one of those companies that rarely shocks investors with a blowout quarter, but nonetheless delivers a nice jolt that sends shares higher. Such steady results can really add up, too, which explains the 228% rise in Lincoln's stock over the past five years. For perspective, Lincoln's rally during that time has crushed the S&P 500 by 146 percentage points. Not bad for the Cleveland-based manufacturer of all things related to welding. This steady performance is just one of the reasons the Fool named Lincoln one of our 25 best companies in America back in February.
The latest quarter was no different. Shares climbed 5% over the past three days after Lincoln announced earnings on Oct. 31. Let's take a look at what the market's so excited about, and whether Lincoln's incredible run can continue.
View from the top
Lincoln's sales growth slowed in the third quarter, but investors were nonetheless impressed by the company's ability to boost profitability. Sales came in at $691.9 million in the last quarter, a 0.8% drop from $697.6 million in the year-ago period. For the nine months ending Sept. 30, sales were also slightly down by 1.4%. Management pointed to a less-than-robust end market for its products, and emphasized the progress it made toward increasing margins.
In the words of CEO Christopher L. Mapes: "While we saw some stabilization late in the quarter, ongoing weak end-market conditions keep us cautious in the near term. As such, we remain focused on driving continued year-over-year expansion in profitability and returns while serving our customers with innovative solutions."
For the quarter ahead, growth is expected to remain sluggish on the top line. Analysts anticipate a decline of 0.8% in sales for the year. But, so far, the tepid economy hasn't stopped Lincoln from posting impressive earnings results.
Operating lean and mean
During the third quarter, Lincoln tightened its belt just enough and watched operating income bounce 7% higher versus last year, to $95 million. Earnings per share followed suit, beating analysts' estimates for the fourth quarter in a row at $0.86 versus a consensus of $0.84, excluding special items.
Investors can take comfort in the fact that management found ways to boost the bottom line in a lackluster environment. But this shouldn't come as news to those familiar with the company. Lincoln's executive team has ensured that its employees received a year-end bonus for 80 straight years, through good times and bad. Even more, the company hasn't had a layoff since 1948.
This knack for running a lean operation allowed the company to boost its operating profit margin by 150 basis points in the third quarter, excluding special items. Hopefully Lincoln can keep up in the next quarter, as analysts expect earnings per share of $0.93, but the outlook for revenue growth remains uninspiring.
Nevertheless, the earnings results were icing on the cake for investors, who have grown accustomed to the real gravy train -- steadily rising cash flows.
Cash is reality
As any analyst worth his or her salt will tell you: "Revenue is vanity. Profits are sanity. Cash is reality." In this regard, Lincoln shareholders really had something to cheer about in the recent period. Cash from operating activities was $155 million in the third quarter compared with $82 million in the prior-year quarter, representing an 88% increase year over year.
Cash flows are the name of the game, and Lincoln's been quite consistent about returning cash to shareholders in recent years. As my colleague Dan Caplinger points out, payout increases have come at a 10% annual pace since 2010. Just before earnings, Lincoln announced a 15% increase in quarterly cash dividends to $0.23. Management further emphasized its strategy in capital allocation during the conference call, noting that it returned approximately 61% of cash flow from operations to shareholders during the first nine months of 2013. Good luck finding another company with that level of generosity.
All in all, there are several concrete reasons to be optimistic about Lincoln Electric's future, including a resilient business with lean operations and strong cash flows. After finishing in eighth place this year in our list of the 25 best companies, Lincoln's stock performance has shocked quite a few Fools, myself included, by rallying 29% in less than nine months. Perhaps this is one of those classic under-the-radar stocks that investors are just waking up to.
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