Is Lincoln Electric the Perfect Stock?
Dec 15th 2011 10:30AM
Updated Dec 15th 2011 1:42PM
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 (NAS: 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.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||6.3%||Fail|
|1-Year Revenue Growth > 12%||30.3%||Pass|
|Margins||Gross Margin > 35%||26.6%||Fail|
|Net Margin > 15%||7.8%||Fail|
|Balance Sheet||Debt to Equity < 50%||7.6%||Pass|
|Current Ratio > 1.3||2.27||Pass|
|Opportunities||Return on Equity > 15%||16.8%||Pass|
|Valuation||Normalized P/E < 20||18.94||Pass|
|Dividends||Current Yield > 2%||1.8%||Fail|
|5-Year Dividend Growth > 10%||10.3%||Pass|
|Total Score||6 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
With a score of six, Lincoln Electric does pretty well, especially in a tough economy. The company has a fairly narrow niche, but it's famous for a policy that few companies share in this day and age.
Lincoln Electric makes welding and cutting products, including arc welding torches and power sources. Its products are used in a variety of industries, ranging from power generation and steel construction to shipbuilding and offshore oil and gas exploration. The company counts Illinois Tool Works (NYS: ITW) as a competitor, and Kennametal (NYS: KMT) also operates in the same general space.
But what has set Lincoln Electric apart from most other companies is its no-layoff policy. For 63 years and counting, the company has never let anyone go due to a lack of work, and that has helped the company's stock outperform the broader averages over the long term. With studies showing that a basket of top employers like Google (NAS: GOOG) and Amazon.com (NAS: AMZN) has outperformed the S&P 500 by a substantial amount over long periods of time, Lincoln's record seems to translate to strong performance.
Lincoln has survived a number of downturns before, but with energy still running on all cylinders, the company has a solid revenue base to count on. If steel producers like U.S. Steel (NYS: X) and shipbuilders can come back from their slump, then Lincoln could be in a better position to capitalize and move closer to perfection.
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 the best investments from the rest.
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Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our " 13 Steps to Investing Foolishly ."
At the time this article was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Google and Amazon.com. Motley Fool newsletter services have recommended buying shares of Kennametal, Google, Amazon.com, and Illinois Tool Works. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.
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