I thought I had this whole industrial/manufacturing upswing figured out. After all, I've invested in a couple companies that have treated me well, and I've been positive on many companies in machinery, parts, and supplies. And yet I've still managed to grossly underestimate just how strong Lincoln Electric (NASDAQ:LECO) was going to get in this upswing.
I suppose I can take some small comfort in the fact that analysts have been a bit behind the curve as well -- Lincoln Electric has surpassed estimates by an average of 13% over the past four quarters and did more than 20% better than it had forecast for this go-round.
Sales jumped 29% this quarter, with organic growth of about 19%. Sales were pretty much strong everywhere. Machine sales were up 22%, and consumables were up 34% (18% without that big acquisition). On the geographical breakout, North American sales were up 38% (24% without the deal), export sales were up 38%, and overseas sales were up 17% in local currency.
But that's not at all. Gross margins improved a bit and would have improved even more on a strictly organic basis. And even with some unusual items here and there, operating income grew 74% from the year-ago period, while operating cash flow was up 65%.
The danger now with stocks like Lincoln Electric is overcorrecting for past mistakes and getting a little too eager to bump up growth estimates. By the same token, there are plenty of late-cycle companies that say they're just beginning to see an upswing in business, and we haven't really even seen a big move in non-residential construction yet. And don't forget the possibility that Lincoln can grow above and beyond its market.
Whether you look at larger companies like Caterpillar (NYSE:CAT) and Ingersoll-Rand (NYSE:IR) or at smaller companies like Lincoln Electric and JLG (NYSE:JLG), times are good for these more rugged businesses. And I'm certainly not about to call an end to the good times.
The trouble for me, though, is that even with newly pumped-up growth estimates, this stock is only undervalued by around 10% or so to my way of seeing things. That's below my margin of safety, so I won't be buying soon -- much as I still kick myself for not following the value mavens at Royce into this one a while ago.
For more industrial-strength Foolishness:
- All's Welding for Lincoln Electric
- JLG Still in the Boom Times
- Ingersoll-Rand Scratches Out More Growth
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
