ESAB Earnings: We Expect Growing Equipment Sales to Help Accelerate Margin Expansion

Narrow-moat-rated ESAB ESAB reported solid first-quarter results, featuring a 12% year-over-year increase in adjusted EBITDA. After a strong start to the year, management raised its outlook for full-year 2023 and now anticipates core organic revenue growth of 3.5%-5.5% (up from 3%-5%), adjusted EBITDA of $430 million-$450 million (up from $420 million-$440 million), and adjusted EPS of $3.85-$4.05 (up from $3.80-$4.00). We’ve increased our fair value estimate to $70 from $65, which reflects our more optimistic operating margin assumptions as well as time value of money. We view the name as modestly undervalued, with shares currently trading in 4-star territory.

ESAB’s first-quarter core sales were up 7% from the same period last year, mostly due to 6% higher pricing (including 8% in the Americas and 5% in EMEA and APAC). Volumes grew 1% year over year, as a 4% volume increase in EMEA and APAC, driven by strong growth in the Middle East and India, was nearly offset by a 3% volume decline in the Americas. The latter was partly due to the firm’s product line simplification in the Americas to focus on higher-margin and less cyclical product lines. ESAB expanded its first-quarter adjusted EBITDA margin by 80 basis points year over year, from 16.6% to 17.4%.

Management said on the earnings call that it will continue to shift the portfolio toward a higher mix of equipment revenue, from 29% in 2022 to around 35% by 2026-2027, by growing the welding equipment, automation, and gas control product lines. ESAB aims to expand its EBITDA margin from around 17% in 2022 to over 20% by 2026-2027. We are encouraged by ESAB’s margin expansion thus far and think the company is well-positioned to continue improving its margins through continuous improvement initiatives as well as mix shift toward higher-margin equipment sales.