ESAB - ESAB Corporation: Well Done By The Welding Player

2023-07-31 19:21:55 ET

Summary

• ESAB Corporation has seen a rather eventful year since the spinoff from its former parent company.
• After some hesitation after the separation, ESAB shares have seen a massive run higher since the fall.
• The re-rating seems largely complete here, as current levels become opportune to take profits in ESAB Corporation.

In May of last year, I believed that ESAB Corporation ( ESAB ) looked like a solid welding play after the spinoff from its former parent company Colfax, which renamed itself into Enovis Corporation ( ENOV ) . After shares were cheap following the spinoff, they have gotten a bit cheaper in the fall as worries about the economy mounted, but ever since ESAB stock has moved higher in a rapid and aggressive fashion.

Since the lows in the fall, shares have more than doubled as modest growth is seen, with a stable $4 earnings per share run rate providing support for shares to be awarded a market multiple.

A Recap

ESAB is short for Elektriska Svetsnings-Aktiebolaget , a business which really is a combination of a Swedish and U.S. business, with roots going back to the earlier part of the 20th century.

The company employs about 9,000 workers and has a product lineup of brands and solutions which include welding accessories and equipment, cutting automation, robotics & automation, filler materials, manual plasma, and medical gases, among others. 70% of sales come from so-called consumables and the remainder from upfront equipment sales.

With a global presence, ESAB Corporation generated $2.4 billion in sales in 2021 on which it posted a relatively solid adjusted EBITDA of $434 million, in what generally can be seen as a GDP+ play, with the plus seen from a focus on faster-growing segments in medics, robotics and digital solutions.

Originally, the company guided for 2022 sales between $2.55 and $2.60 billion, with EBITDA actually seen down to $430 million, but this guidance was cut to $2.45-$2.50 billion in sales and EBITDA of $410 million as a result of the retreat from Russia. Despite this shortfall, adjusted earnings per share were seen around $3.95 per share.

After the spinoff in April of last year, shares have been trading in a $45-$55 range, with shares trading at $47 when I looked at them in the spring around the time of the separation. Based on a share count of 60 million shares, the company supported a $2.8 billion equity valuation and based on the communicated leverage ratio, the company employed about $1.2 billion in net debt.

In May of last year, the company posted a solid 14% increase in first quarter sales to $648 million with EBITDA up as much as 16% to $109 million, as the company maintained the lowered guidance. Amidst the lower earnings multiples, the company traded at a huge discount compared to peers like Illinois Tool Works ( ITW ) and Lincoln Electrics ( LECO ) , both of which traded at far higher multiples.

While the resulting 12 times multiple looked like a screaming buy, I noted that many spinoffs have not lived up to expectations after investors often found negative surprises, as well as corporate cost overhead overhang after the separation. These concerns meant that I only initiated small at $47, as I bought some more shares at $40 last summer.

A Recovery Play

I was happy to buy even more shares of ESAB at levels in the lower thirties in the fall of 2022 as investors were fearing a real manufacturing recession. At the time, I believed that shares were attractively priced, yet was surprised by the speed and extent of the recovery in the share price in the months which followed. Shares ended 2022 around $50 per share and have recently hit the $70 mark, now trading at $67 per share.

During 2022, the company made steady progress as it announced a bolt-on deal for Ohio Medical in a $127 million deal in October, and later that year provided its first battery-powered welding machine. Moreover, the overhang from the former parent company disappeared, as Enovis sold its 6.0 million shares held in the company for $40 per share in November.

By March of this year, ESAB announced its 2022 results as full year sales rose in a modest fashion from $2.43 billion in 2021, to $2.59 billion in 2022. Full year operating earnings rose from $306 million to $329 million as earnings came in at $3.69 per share. Net debt was reported at $1.15 billion and with EBITDA for the year reported at $417 million, leverage ratios came in around expectations given at the time of the spin-off, that is despite the deal for Ohio, at 2.7 times EBITDA.

For 2023, the company outlined a decent outlook, with sales seen up 2-4% and core EBITDA seen up to $420-$440 million (comparing to a $408 million number based on this metric in 2022). This suggests a roughly $22 million improvement (at the midpoint of the guidance) for the year. This could boost after-tax profits by about $0.25-$0.30 per share, for an earnings number which could approach the $4 per share number.

Momentum Continues

Following a solid first quarter, in which reported sales were up 6%, the company hiked the midpoint of the core sales growth number for the year by half a point to 5%, with EBITDA now seen at a midpoint of $440 million and earnings at $3.95 per share.

With net debt down to $1.13 billion, leverage ratios have fallen below 2.6 times already, as leverage ratios are set to improve further as the earnings power around $4 per share seem pretty solid here. With shares having risen to $70 at this point in time, the market has re-rated the stock from a low double-digit multiple to about 17-18 times earnings, a multiple which is more in line with the market.

Believing that the re-rating is fair and largely completed, I am happy to sell ESAB Corporation shares on rips higher here, as the easier money has been made with shares having more than doubled from the lows in the fall.

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