Intrinsic value of Lincoln Electric Holdings, Inc. - LECO

Previous Close

$84.45

  Intrinsic Value

$60.41

stock screener

  Rating & Target

sell

-28%

Previous close

$84.45

 
Intrinsic value

$60.41

 
Up/down potential

-28%

 
Rating

sell

We calculate the intrinsic value of LECO stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 0001), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 5.3

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
   2
   3
   4
   5
   6
   7
   8
   9
   10
   11
   12
   13
   14
   15
   16
   17
   18
   19
   20
   21
   22
   23
   24
   25
   26
   27
   28
   29
   30
   31

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  2.00
  2.30
  2.57
  2.81
  3.03
  3.23
  3.41
  3.57
  3.71
  3.84
  3.95
  4.06
  4.15
  4.24
  4.31
  4.38
  4.44
  4.50
  4.55
  4.59
  4.64
  4.67
  4.70
  4.73
  4.76
  4.78
  4.81
  4.83
  4.84
  4.86
Revenue, $m
  3,090
  3,161
  3,242
  3,333
  3,434
  3,545
  3,666
  3,796
  3,937
  4,088
  4,250
  4,422
  4,606
  4,801
  5,008
  5,228
  5,460
  5,706
  5,965
  6,240
  6,529
  6,834
  7,155
  7,494
  7,851
  8,226
  8,622
  9,038
  9,476
  9,936
Variable operating expenses, $m
  2,703
  2,764
  2,834
  2,912
  2,999
  3,095
  3,198
  3,311
  3,432
  3,562
  3,659
  3,807
  3,965
  4,133
  4,311
  4,500
  4,700
  4,912
  5,135
  5,371
  5,620
  5,883
  6,160
  6,451
  6,758
  7,082
  7,422
  7,780
  8,157
  8,553
Fixed operating expenses, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total operating expenses, $m
  2,703
  2,764
  2,834
  2,912
  2,999
  3,095
  3,198
  3,311
  3,432
  3,562
  3,659
  3,807
  3,965
  4,133
  4,311
  4,500
  4,700
  4,912
  5,135
  5,371
  5,620
  5,883
  6,160
  6,451
  6,758
  7,082
  7,422
  7,780
  8,157
  8,553
Operating income, $m
  387
  397
  408
  421
  435
  450
  467
  485
  505
  526
  591
  615
  641
  668
  697
  728
  760
  794
  830
  868
  909
  951
  996
  1,043
  1,093
  1,145
  1,200
  1,258
  1,319
  1,383
EBITDA, $m
  487
  498
  511
  525
  541
  559
  578
  598
  620
  644
  670
  697
  726
  757
  789
  824
  860
  899
  940
  983
  1,029
  1,077
  1,128
  1,181
  1,237
  1,296
  1,359
  1,424
  1,493
  1,566
Interest expense (income), $m
  19
  38
  40
  41
  44
  46
  49
  51
  55
  58
  62
  66
  70
  74
  79
  84
  90
  95
  101
  108
  115
  122
  129
  137
  146
  155
  164
  174
  184
  195
  206
Earnings before tax, $m
  349
  357
  367
  377
  389
  402
  416
  431
  447
  464
  526
  546
  567
  589
  613
  638
  664
  693
  722
  754
  787
  822
  858
  897
  938
  981
  1,026
  1,074
  1,124
  1,176
Tax expense, $m
  94
  96
  99
  102
  105
  109
  112
  116
  121
  125
  142
  147
  153
  159
  165
  172
  179
  187
  195
  203
  212
  222
  232
  242
  253
  265
  277
  290
  303
  318
Net income, $m
  255
  261
  268
  275
  284
  293
  304
  314
  326
  339
  384
  398
  414
  430
  447
  466
  485
  506
  527
  550
  574
  600
  627
  655
  685
  716
  749
  784
  820
  859

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  2,397
  2,452
  2,515
  2,586
  2,664
  2,750
  2,844
  2,945
  3,054
  3,172
  3,297
  3,431
  3,573
  3,725
  3,885
  4,056
  4,236
  4,427
  4,628
  4,841
  5,065
  5,302
  5,551
  5,814
  6,091
  6,382
  6,689
  7,012
  7,351
  7,708
Adjusted assets (=assets-cash), $m
  2,397
  2,452
  2,515
  2,586
  2,664
  2,750
  2,844
  2,945
  3,054
  3,172
  3,297
  3,431
  3,573
  3,725
  3,885
  4,056
  4,236
  4,427
  4,628
  4,841
  5,065
  5,302
  5,551
  5,814
  6,091
  6,382
  6,689
  7,012
  7,351
  7,708
Revenue / Adjusted assets
  1.289
  1.289
  1.289
  1.289
  1.289
  1.289
  1.289
  1.289
  1.289
  1.289
  1.289
  1.289
  1.289
  1.289
  1.289
  1.289
  1.289
  1.289
  1.289
  1.289
  1.289
  1.289
  1.289
  1.289
  1.289
  1.289
  1.289
  1.289
  1.289
  1.289
Average production assets, $m
  689
  705
  723
  743
  766
  791
  817
  847
  878
  912
  948
  986
  1,027
  1,071
  1,117
  1,166
  1,218
  1,272
  1,330
  1,391
  1,456
  1,524
  1,596
  1,671
  1,751
  1,834
  1,923
  2,015
  2,113
  2,216
Working capital, $m
  349
  357
  366
  377
  388
  401
  414
  429
  445
  462
  480
  500
  520
  543
  566
  591
  617
  645
  674
  705
  738
  772
  809
  847
  887
  930
  974
  1,021
  1,071
  1,123
Total debt, $m
  733
  767
  807
  851
  900
  953
  1,011
  1,075
  1,143
  1,216
  1,294
  1,377
  1,466
  1,560
  1,660
  1,767
  1,879
  1,998
  2,123
  2,255
  2,395
  2,543
  2,698
  2,862
  3,034
  3,216
  3,407
  3,608
  3,820
  4,042
Total liabilities, $m
  1,493
  1,528
  1,567
  1,611
  1,660
  1,713
  1,772
  1,835
  1,903
  1,976
  2,054
  2,137
  2,226
  2,321
  2,421
  2,527
  2,639
  2,758
  2,883
  3,016
  3,156
  3,303
  3,458
  3,622
  3,794
  3,976
  4,167
  4,368
  4,580
  4,802
Total equity, $m
  904
  924
  948
  975
  1,004
  1,037
  1,072
  1,110
  1,152
  1,196
  1,243
  1,293
  1,347
  1,404
  1,465
  1,529
  1,597
  1,669
  1,745
  1,825
  1,910
  1,999
  2,093
  2,192
  2,296
  2,406
  2,522
  2,643
  2,771
  2,906
Total liabilities and equity, $m
  2,397
  2,452
  2,515
  2,586
  2,664
  2,750
  2,844
  2,945
  3,055
  3,172
  3,297
  3,430
  3,573
  3,725
  3,886
  4,056
  4,236
  4,427
  4,628
  4,841
  5,066
  5,302
  5,551
  5,814
  6,090
  6,382
  6,689
  7,011
  7,351
  7,708
Debt-to-equity ratio
  0.810
  0.830
  0.850
  0.870
  0.900
  0.920
  0.940
  0.970
  0.990
  1.020
  1.040
  1.060
  1.090
  1.110
  1.130
  1.160
  1.180
  1.200
  1.220
  1.240
  1.250
  1.270
  1.290
  1.310
  1.320
  1.340
  1.350
  1.360
  1.380
  1.390
Adjusted equity ratio
  0.377
  0.377
  0.377
  0.377
  0.377
  0.377
  0.377
  0.377
  0.377
  0.377
  0.377
  0.377
  0.377
  0.377
  0.377
  0.377
  0.377
  0.377
  0.377
  0.377
  0.377
  0.377
  0.377
  0.377
  0.377
  0.377
  0.377
  0.377
  0.377
  0.377

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  255
  261
  268
  275
  284
  293
  304
  314
  326
  339
  384
  398
  414
  430
  447
  466
  485
  506
  527
  550
  574
  600
  627
  655
  685
  716
  749
  784
  820
  859
Depreciation, amort., depletion, $m
  100
  101
  103
  104
  106
  108
  110
  113
  115
  118
  78
  82
  85
  88
  92
  96
  101
  105
  110
  115
  120
  126
  132
  138
  145
  152
  159
  167
  175
  183
Funds from operations, $m
  355
  362
  370
  380
  390
  402
  414
  427
  442
  457
  462
  480
  499
  518
  540
  562
  586
  611
  637
  665
  695
  726
  759
  793
  829
  868
  908
  950
  995
  1,042
Change in working capital, $m
  7
  8
  9
  10
  11
  13
  14
  15
  16
  17
  18
  19
  21
  22
  23
  25
  26
  28
  29
  31
  33
  34
  36
  38
  40
  42
  45
  47
  49
  52
Cash from operations, $m
  348
  354
  361
  370
  379
  389
  400
  413
  426
  440
  444
  460
  478
  496
  516
  537
  559
  583
  608
  634
  662
  691
  722
  755
  789
  825
  863
  903
  946
  990
Maintenance CAPEX, $m
  -56
  -57
  -58
  -60
  -61
  -63
  -65
  -68
  -70
  -73
  -75
  -78
  -82
  -85
  -88
  -92
  -96
  -101
  -105
  -110
  -115
  -120
  -126
  -132
  -138
  -145
  -152
  -159
  -167
  -175
New CAPEX, $m
  -13
  -16
  -18
  -20
  -23
  -25
  -27
  -29
  -31
  -34
  -36
  -38
  -41
  -44
  -46
  -49
  -52
  -55
  -58
  -61
  -64
  -68
  -72
  -76
  -80
  -84
  -88
  -93
  -98
  -103
Cash from investing activities, $m
  -69
  -73
  -76
  -80
  -84
  -88
  -92
  -97
  -101
  -107
  -111
  -116
  -123
  -129
  -134
  -141
  -148
  -156
  -163
  -171
  -179
  -188
  -198
  -208
  -218
  -229
  -240
  -252
  -265
  -278
Free cash flow, $m
  279
  281
  285
  289
  295
  301
  308
  316
  324
  334
  332
  343
  355
  368
  382
  396
  411
  428
  445
  463
  482
  503
  525
  547
  571
  597
  624
  652
  681
  713
Issuance/(repayment) of debt, $m
  30
  34
  39
  44
  49
  54
  58
  63
  68
  73
  78
  83
  89
  94
  100
  106
  112
  119
  125
  132
  140
  147
  155
  164
  172
  182
  191
  201
  212
  223
Issuance/(repurchase) of shares, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  30
  34
  39
  44
  49
  54
  58
  63
  68
  73
  78
  83
  89
  94
  100
  106
  112
  119
  125
  132
  140
  147
  155
  164
  172
  182
  191
  201
  212
  223
Total cash flow (excl. dividends), $m
  309
  316
  324
  334
  344
  355
  366
  379
  393
  407
  411
  427
  444
  462
  482
  502
  524
  546
  570
  596
  622
  650
  680
  711
  744
  778
  815
  853
  893
  935
Retained Cash Flow (-), $m
  -17
  -21
  -24
  -27
  -30
  -32
  -35
  -38
  -41
  -44
  -47
  -50
  -54
  -57
  -61
  -64
  -68
  -72
  -76
  -80
  -85
  -89
  -94
  -99
  -104
  -110
  -116
  -122
  -128
  -135
Prev. year cash balance distribution, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
  292
  295
  300
  307
  314
  322
  331
  341
  351
  363
  363
  376
  390
  405
  421
  438
  456
  474
  494
  515
  538
  561
  586
  612
  640
  669
  699
  731
  765
  800
Discount rate, %
  4.30
  4.52
  4.74
  4.98
  5.23
  5.49
  5.76
  6.05
  6.35
  6.67
  7.00
  7.35
  7.72
  8.11
  8.51
  8.94
  9.39
  9.86
  10.35
  10.87
  11.41
  11.98
  12.58
  13.21
  13.87
  14.56
  15.29
  16.05
  16.86
  17.70
PV of cash for distribution, $m
  280
  270
  261
  253
  243
  234
  224
  213
  202
  190
  173
  161
  148
  136
  124
  111
  99
  87
  76
  65
  56
  47
  38
  31
  25
  20
  15
  11
  8
  6
Current shareholders' claim on cash, %
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0

Lincoln Electric Holdings, Inc. is a manufacturer of welding, cutting and brazing products. The Company operates through three segments: Americas Welding, International Welding and The Harris Products Group. The Americas Welding segment includes welding operations in North and South America. The International Welding segment primarily includes welding operations in Europe, Africa, Asia and Australia. The Harris Products Group includes the Company's global cutting, soldering and brazing businesses, as well as the retail business in the United States. Its welding products include arc welding power sources, wire feeding systems, robotic welding packages, integrated automation systems, fume extraction equipment, consumable electrodes, fluxes and welding accessories, and specialty welding consumables and fabrication. Its product offerings also include computer numeric controlled plasma and oxy-fuel cutting systems, and regulators and torches used in oxy-fuel welding, cutting and brazing.

FINANCIAL RATIOS  of  Lincoln Electric Holdings, Inc. (LECO)

Valuation Ratios
P/E Ratio 28
Price to Sales 2.4
Price to Book 7.8
Price to Tangible Book
Price to Cash Flow 18.3
Price to Free Cash Flow 21.9
Growth Rates
Sales Growth Rate -10.3%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate -2%
Cap. Spend. - 3 Yr. Gr. Rate -8%
Financial Strength
Quick Ratio 190
Current Ratio 0.2
LT Debt to Equity 99%
Total Debt to Equity 99.3%
Interest Coverage 16
Management Effectiveness
Return On Assets 11.4%
Ret/ On Assets - 3 Yr. Avg. 10.6%
Return On Total Capital 14.6%
Ret/ On T. Cap. - 3 Yr. Avg. 13.9%
Return On Equity 24.1%
Return On Equity - 3 Yr. Avg. 17.9%
Asset Turnover 1.2
Profitability Ratios
Gross Margin 34.7%
Gross Margin - 3 Yr. Avg. 33.9%
EBITDA Margin 15.9%
EBITDA Margin - 3 Yr. Avg. 14.1%
Operating Margin 12.7%
Oper. Margin - 3 Yr. Avg. 11%
Pre-Tax Margin 12.2%
Pre-Tax Margin - 3 Yr. Avg. 10.7%
Net Profit Margin 8.7%
Net Profit Margin - 3 Yr. Avg. 7.6%
Effective Tax Rate 28.5%
Eff/ Tax Rate - 3 Yr. Avg. 28.8%
Payout Ratio 43.9%

LECO stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the LECO stock intrinsic value calculation we used $3029 million for the last fiscal year's total revenue generated by Lincoln Electric Holdings, Inc.. The default revenue input number comes from 0001 income statement of Lincoln Electric Holdings, Inc.. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our LECO stock valuation model: a) initial revenue growth rate of 2% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 4.3%, whose default value for LECO is calculated based on our internal credit rating of Lincoln Electric Holdings, Inc., is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Lincoln Electric Holdings, Inc..
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of LECO stock the variable cost ratio is equal to 87.5%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $0 million in the base year in the intrinsic value calculation for LECO stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 5.4% for Lincoln Electric Holdings, Inc..

Corporate tax rate of 27% is the nominal tax rate for Lincoln Electric Holdings, Inc.. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the LECO stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for LECO are equal to 22.3%.

Life of production assets of 12.1 years is the average useful life of capital assets used in Lincoln Electric Holdings, Inc. operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for LECO is equal to 11.3%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $886.942 million for Lincoln Electric Holdings, Inc. - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 63.233 million for Lincoln Electric Holdings, Inc. is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Lincoln Electric Holdings, Inc. at the current share price and the inputted number of shares is $5.3 billion.

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