Over the last six months, ESAB shares have sunk to $96.09, producing a disappointing 18.2% loss - worse than the S&P 500’s 2% drop. This might have investors contemplating their next move.
Is now the time to buy ESAB, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Is ESAB Not Exciting?
Even though the stock has become cheaper, we don't have much confidence in ESAB. Here are three reasons we avoid ESAB and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Unfortunately, ESAB’s 4.1% annualized revenue growth over the last four years was sluggish. This was below our standard for the industrials sector.
2. Core Business Falling Behind as Demand Plateaus
We can better understand Professional Tools and Equipment companies by analyzing their organic revenue. 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). 
3. Free Cash Flow Margin Dropping
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, ESAB’s margin dropped by 3.2 percentage points over the last five years. If its declines continue, it could signal increasing investment needs and capital intensity. ESAB’s free cash flow margin for the trailing 12 months was 8.5%.
Final Judgment
ESAB isn’t a terrible business, but it isn’t one of our picks. After the recent drawdown, the stock trades at 17.3× forward P/E (or $96.09 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're fairly confident there are better investments elsewhere. Let us point you toward a dominant Aerospace business that has perfected its M&A strategy.
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