ESAB Corp

ESAB's second-quarter organic sales rose roughly 2.5% year over year, supported by 0.5% volume growth and 2% price increases. Core adjusted EBITDA margin contracted 90 basis points year over year on higher oil prices amid Middle East tensions and dilution from the EWM acquisition.

Why it matters: Management raised its full-year sales and adjusted EBITDA guidance by $150 million and $35 million, respectively. The latter reflects a $50 million contribution from the recent Eddyfi acquisition, partly offset by $15 million in price/cost headwinds. After six consecutive quarters of flat or declining sales, Americas turned positive with 4.9% year-over-year organic growth. Europe/Middle East/Africa and Asia-Pacific organic sales were up 1% despite headwinds in the Middle East. We expect continued momentum as investments in product innovation continue to yield returns. We see the margin headwinds as transitory. We expect ESAB's margins to improve in the coming quarters thanks to price increases and cost-reduction initiatives.

The bottom line: We have raised our fair value estimate for narrow-moat ESAB to $121 per share from $117, driven by our slightly more optimistic revenue growth projections. The stock is currently trading roughly 22% below our fair value estimate and remains in 4-star territory. Year to date, the shares are down roughly 15% amid ongoing tariff uncertainty and conflict in the Middle East. We expect investor sentiment to improve toward 2027 as temporary margin headwinds ease and organic sales continue to rebound.

Big picture: Management has used acquisitions to transform ESAB's portfolio over the last decade. Since 2016, the company has increased its equipment mix from 38% to around 52% of sales and improved gross margins by over 500 basis points.

We are raising our fair value estimate to $121 per share from $117 after second-quarter results. Management raised its full-year sales and adjusted EBITDA guidance by $150 million and $35 million, respectively.

We forecast ESAB's core revenue to increase at a roughly 6% compound annual growth rate over our explicit five-year forecast period. We expect that increased R&D spending will continue to drive revenue growth thanks to new product introductions. We model a roughly 350-basis-point expansion in adjusted EBITDA margin, driven by volume leverage, a mix shift toward equipment sales, the margin-accretive acquisition of Eddyfi, and productivity initiatives.

We assume an 8% weighted average cost of capital and 22% long-run effective tax rate in our model.

We believe that ESAB, one of the largest manufacturers of welding and cutting products in the world, merits a Narrow Morningstar Economic Moat Rating based on intangible assets and customer switching costs.

Alongside rivals Lincoln Electric and Illinois Tool Works’ Miller brand, ESAB is one of the top three players offering a complete welding solutions package, including equipment and consumables, which we think differentiates the firm from smaller competitors. We believe that ESAB’s moat rests on intangible assets, including its reputation for quality, patent portfolio, and strong relationships with distributors. The company has established one of the most recognized brands in welding and enjoys leading market share internationally, though it is the number-three player in the United States behind Lincoln Electric and Miller. We believe brand loyalty is relatively high in welding, and customers tend to stick with one manufacturer. The top brands in the industry resonate with customers, and welders tend to stay loyal to their preferred brand based on the equipment they trained on, familiarity with the product line, and customer service. ESAB capitalizes on this through its welding centers and training programs, which create exposure to the brand and drive brand loyalty among new professional welders.

When Colfax acquired ESAB in 2012, the business was struggling financially and underinvested in R&D, and as a result ceded market share to its larger competitors. Since then, ESAB has steadily increased its R&D spending from 0.5% of sales in 2012 to 1.4% in 2024, bringing it more in line with its main rivals. ESAB’s increased R&D spending has started to bear fruit, and the company has gained market share in recent years thanks to new product introductions. For example, the company has had success with its Rebel line, which uses smart technology that simplifies the setup and constantly monitors the weld quality, a valuable feature considering an ongoing shortage of skilled labor in the industry. Additionally, the company regularly engages in bolt-on acquisitions to supplement its portfolio. For instance, the 2017 acquisition of TBi Industries added a leading robotic torch technology, which is important for welding productivity. Overall, ESAB’s recent acquisitions have focused on bolstering its portfolio of specialty alloys, robotics and automation solutions, and digital solutions. We view ESAB’s R&D spending as adequate to maintain its competitive position, though we think it will prove challenging for the firm to gain significant ground on Lincoln Electric and Miller, as both of its large rivals have established reputable brands and also have strong records of introducing innovative products.

We also believe ESAB benefits from customer switching costs. ESAB is one of the top three global players that offer a complete welding solutions package, including equipment and consumables. We think this differentiates the company from smaller competitors that only offer either equipment or consumables, as some customers value ESAB’s one-stop-shop approach and comprehensive suite of welding solutions. Furthermore, based on their experience and familiarity with their preferred brand’s equipment, we believe that welders tend to be reluctant to switch brands without the promise of a meaningful improvement in performance or reduction in cost.

We think that new Internet of Things solutions will reinforce customer switching costs. For instance, WeldCloud is an IoT solution that allows customers to monitor their fleet, improve quality, and increase the productivity of their welding operations. We think that combining digital solutions with its equipment will allow ESAB to create stickier customer relationships by offering an integrated package. We also expect digital solutions to boost ESAB’s recurring revenue by adding software-as-a-service-based sales.

In recent years, ESAB has bolstered its portfolio of robotics solutions through acquisitions. For example, in 2017, the company acquired TBi, a leading manufacturer of robotic welding torch technology. In 2021, ESAB acquired Octopuz, a software company that specializes in offline robot programming. We believe that these acquisitions complement ESAB’s core portfolio of welding technology, analytics, and productivity solutions. We think that by building out its portfolio of robotics solutions, ESAB can offer customers a more comprehensive package (including equipment, consumables, and software) and capture more wallet share.

While sales of traditional equipment and consumables are often one-off transactions, sales of automation solutions inherently involve tighter client relationships as the supplier will often collaborate with customers on highly engineered solutions that may be customized to their needs. As automation solutions are tightly integrated into the customer’s manufacturing process and perform a mission-critical function, we believe customers are reluctant to switch vendors, given the potential cost of unscheduled downtime or possible modifications to the production line.

On an organic revenue basis, ESAB has outgrown its two main competitors since 2018.

ESAB has delivered steady and impressive margin expansion, having more than doubled its adjusted operating margin since 2012.

Automation and digital solutions have the potential to reinforce ESAB’s moat and deliver revenue growth well above the core welding growth rate.

As a result of its M&A-driven growth strategy, ESAB faces acquisition risk, including the possibility of overpaying for acquisitions and challenges integrating acquired companies.

New product introductions could fail to generate expected revenue and returns.

While ESAB has leading market share abroad, it lags Lincoln Electric and Miller in the United States.