Lincoln Electric Holdings, Inc. (NASDAQ:LECO)

TMF10KChallenge (31.86) Submitted: 4/29/2010 4:55:33 PM : Start Price: $29.63 LECO Score: +54.53

Motley Fool Analyst Development Program- 10KChallenge writeupAnalyst: Bryan HinmonLincoln Electric Holdings, Inc.Nasdaq: LECO Market DataCurrent Price:   $60.29   Market Cap:   $2,570 MMMRY Sales:   $1,729 MMSector:      IndustrialsIndustry:   Industrial MachineryBusiness DescriptionLincoln Electric has been a Midwestern institution since 1895. The Company is more than just a designer and manufacturer of welding and cutting products – they are “The Welding Experts.” In fact, aside from the fact that the moniker was earned over a century, the slogan is actually trademarked. The core of Lincoln’s business is arc welding. Welding, in general, is the process of fusing two pieces of metal together. Arc welding is a type of welding that gets its name from the path of the electrodes that heat the metals and make them unite. The Company generates about 40 percent of revenue from welding and cutting machinery that ranges from huge industrial grade stuff to personal, do-it-yourselfer, style products. Lincoln is also a pioneer in robotic welding technology. The remaining 60 percent of its business comes from selling consumables that are used up during the welding process. This provides recurring revenue for the Company.Arc welding is used in numerous applications. Infrastructure (buildings, bridges and rail) and energy (pipelines and offshore E&P) are the predominant applications, though welding is important in the auto and shipbuilding industries too.Lincoln is the world’s largest manufacturer of consumables and equipment thanks to its long history, pristine reputation and global presence. It has 36 manufacturing facilities in 20 countries and sales offices worldwide. Additionally, Lincoln spends a good deal (relative to competitors) on R&D. A key result of this is the Company’s “Guaranteed Cost Reduction Program.” Under this program, the Company guarantees that the user will achieve cost savings in its manufacturing process when it utilizes Lincoln’s products. With such a guarantee winning new customers is easy.Competitive LandscapeThreat of SubstitutesThe use of steel for infrastructure has no substitutes, and given that forging the steel used to make a skyscraper in one single piece is impossible, welding doesn’t have many substitutes. So long as engineers continue to be concerned with trivial things like structural integrity and safety, welding is pretty well set in place.Threat of New EntryWelding is a mature industry undergoing a bit of a revival. Returns are not so attractive that they would entice new entrants. However, the existing competition is excited about the “land grab” that appears set as global infrastructure looks set to grow.Competitive RivalryThere are four major players and several smaller, regional players in the welding business. Lincoln is the largest, with 14 percent market share. The Company has grown its market share over the past century and has acquired smaller, weaker folk. Others in the business include Illinois Tool Works, EASB Welding & Cutting and Liquide Welding. The industry continues to be in a state of consolidation.Power of BuyersLincoln has thousands of customers and would not be materially impacted if it lost one, or even a few. Power of SuppliersLincoln uses raw materials that are widely available as inputs to its products. It relies on various chemicals, electronics, steel, engines, brass, copper and aluminum alloys. Most of these are available on the open market. Long-Term ProspectsAging and deteriorating infrastructure, combined with the search for new and more efficient energy sources will drive demand for Lincoln’s welding and cutting tools. Operating a mature industry, Lincoln will rely on rock-solid customer relationships to maintain its consumable sales. The industry is likely to continue to consolidate, which given the health of the Company’s balance sheet and still low (but dominant market share), will work to Lincoln’s advantage. I think the long-term prospects are fair but expect Lincoln to fare the best of all its competitors.