Political and economic risks
In fiscal 2015, Lincoln Electric’s (LECO) 45% of the total revenues were outside the United States. This exposes LECO to uncertainties related to politics, import and export limitations, exchange controls, and currency fluctuations.
LECO’s business is also vulnerable to economic conditions such as high interest rates, inflation, high labor costs, tax laws, and trade barriers. Overall demand for arc welding and cutting products is determined by economic cycles, the level of capital spending, and other industrial sectors.
Availability of raw material and volatility in prices
LECO is vastly exposed to market risk in its normal course of business. These risks include availability as well as price fluctuations in the purchase of energy and other commodities used as raw materials.
Steel, nonferrous metal, and chemicals are LECO’s core raw material. Prices of these commodities have a great impact on LECO’s business. Movements in prices are subject to economic conditions and speculative actions. The company’s revenues and profitability are largely affected by its cost components.
Global growth: Orders impacting revenues
The revival of global growth is of the utmost importance to Lincoln Electric. The company’s revenue declined by 1% in 2014 while it further deteriorated by 10% in 2015.
There has been a decline in revenues for all of LECO’s segments around the globe. This can be attributed to the underperformance in the macro industrials (XLI), particularly in the machinery segment that has led to sales erosion. This is due to woes in oil and gas and shipbuilding, as well as weak demand in emerging markets.
Cognex Corp. (CGNX), Rockwell Automation (ROK), and ABB Ltd. (ABB) are also among the top ten holdings of the fund. They account for 2.2%, 2.1%, and 2.0%, respectively. LECO is also part of the SPDR S&P Dividend ETF (SDY).