Over the past six months, ESAB’s shares (currently trading at $97) have posted a disappointing 15.2% loss, well below the S&P 500’s 9.3% gain. This was partly due to its softer quarterly results and might have investors contemplating their next move.
Is there a buying opportunity in ESAB, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Is ESAB Not Exciting?
Even though the stock has become cheaper, we’re sitting this one out for now. Here are three reasons why ESAB doesn’t excite us, plus one stock we’d rather own.
1. Core Business Falling Behind as Demand Plateaus
In addition to reported revenue, organic revenue is a useful data point for analyzing Professional Tools and Equipment companies. This metric gives visibility into ESAB’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.
Over the last two years, ESAB failed to grow its organic revenue. This performance was underwhelming and implies it may need to improve its products, pricing, or go-to-market strategy. It also suggests ESAB might have to lean into acquisitions to accelerate growth, which isn’t ideal because M&A can be expensive and risky (integrations often disrupt focus). 
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect ESAB’s revenue to rise by 6.5%. While this projection indicates its newer products and services will spur better top-line performance, it is still below the sector average.
3. Recent EPS Growth Below Our Standards
Although long-term earnings trends give us the big picture, we like to analyze EPS over a shorter period to see if we are missing a change in the business.
ESAB’s EPS grew at an unimpressive 7.5% compounded annual growth rate over the last two years. On the bright side, this performance was higher than its 2.3% annualized revenue growth and tells us the company became more profitable on a per-share basis as it expanded.
Final Judgment
ESAB’s business quality ultimately falls short of our standards. After the recent drawdown, the stock trades at 15.7× forward P/E (or $97 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We’re fairly confident there are better investments elsewhere. We’d suggest looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.
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