ESAB (ESAB)

Welding and cutting equipment manufacturer ESAB (NYSE:ESAB) reported revenue ahead of Wall Streets expectations in Q3 CY2025, with sales up 8.1% year on year to $727.8 million. Its non-GAAP profit of $1.32 per share was 3.7% above analysts’ consensus estimates.

Company Overview

Having played a significant role in the construction of the iconic Sydney Opera House, ESAB (NYSE:ESAB) manufactures and sells welding and cutting equipment for numerous industries.

Automation that increases efficiency and connected equipment that collects analyzable data have been trending, creating new demand. Some professional tools and equipment companies also provide software to accompany measurement or automated machinery, adding a stream of recurring revenues to their businesses. On the other hand, professional tools and equipment companies are at the whim of economic cycles. Consumer spending and interest rates, for example, can greatly impact the industrial production that drives demand for these companies’ offerings.

Competitors offering similar products include Lincoln Electric (NASDAQ:LECO), ITW (NYSE:ITW), and Colfax (NYSE:CFX).

A company’s long-term performance is an indicator of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Regrettably, ESAB’s sales grew at a sluggish 4.1% compounded annual growth rate over the last four years. This was below our standard for the industrials sector and is a rough starting point for our analysis.

Long-term growth is the most important, but within industrials, a stretched historical view may miss new industry trends or demand cycles. ESAB’s recent performance shows its demand has slowed as its revenue was flat over the last two years.

We can dig further into the company’s sales dynamics by analyzing its organic revenue, which strips out one-time events like acquisitions and currency fluctuations that don’t accurately reflect its fundamentals. Over the last two years, ESAB’s organic revenue averaged 1% year-on-year growth. Because this number aligns with its two-year revenue growth, we can see the company’s core operations (not acquisitions and divestitures) drove most of its results.

This quarter, ESAB reported year-on-year revenue growth of 8.1%, and its $727.8 million of revenue exceeded Wall Street’s estimates by 4.6%.

Looking ahead, sell-side analysts expect revenue to grow 5.5% over the next 12 months. While this projection indicates its newer products and services will catalyze better top-line performance, it is still below the sector average.

ESAB’s unit economics are great compared to the broader industrials sector and signal that it enjoys product differentiation through quality or brand. As you can see below, it averaged an excellent 36.1% gross margin over the last five years. Said differently, roughly $36.08 was left to spend on selling, marketing, R&D, and general administrative overhead for every $100 in revenue.

ESAB produced a 37% gross profit margin in Q3, in line with the same quarter last year. Zooming out, the company’s full-year margin has remained steady over the past 12 months, suggesting its input costs (such as raw materials and manufacturing expenses) have been stable and it isn’t under pressure to lower prices.

Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

ESAB has been an efficient company over the last five years. It was one of the more profitable businesses in the industrials sector, boasting an average operating margin of 14.3%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Looking at the trend in its profitability, ESAB’s operating margin rose by 2.4 percentage points over the last five years, as its sales growth gave it operating leverage.

In Q3, ESAB generated an operating margin profit margin of 14.6%, down 1.1 percentage points year on year. Since ESAB’s operating margin decreased more than its gross margin, we can assume it was less efficient because expenses such as marketing, R&D, and administrative overhead increased.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

ESAB’s weak 3.6% annual EPS growth over the last four years aligns with its revenue performance. On the bright side, this tells us its incremental sales were profitable.

Like with revenue, we analyze EPS over a more recent period because it can provide insight into an emerging theme or development for the business.

For ESAB, its two-year annual EPS growth of 7.5% was higher than its four-year trend. Accelerating earnings growth is almost always an encouraging data point.

In Q3, ESAB reported adjusted EPS of $1.32, up from $1.28 in the same quarter last year. This print beat analysts’ estimates by 3.7%. Over the next 12 months, Wall Street expects ESAB’s full-year EPS of $5.34 to grow 7.9%.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

ESAB has shown impressive cash profitability, enabling it to ride out cyclical downturns more easily while maintaining its investments in new and existing offerings. The company’s free cash flow margin averaged 8.8% over the last five years, better than the broader industrials sector.

Taking a step back, we can see that ESAB’s margin dropped by 3.2 percentage points during that time. If its declines continue, it could signal increasing investment needs and capital intensity.

ESAB’s free cash flow clocked in at $70.2 million in Q3, equivalent to a 9.6% margin. The company’s cash profitability regressed as it was 3.8 percentage points lower than in the same quarter last year, suggesting its historical struggles have dragged on.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

ESAB’s management team makes decent investment decisions and generates value for shareholders. Its five-year average ROIC was 11.6%, slightly better than typical industrials business.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, ESAB’s ROIC averaged 2 percentage point increases each year. This is a good sign, and we hope the company can keep improving.

ESAB reported $218.2 million of cash and $1.34 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $542 million of EBITDA over the last 12 months, we view ESAB’s 2.1× net-debt-to-EBITDA ratio as safe. We also see its $32.48 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We were impressed by how significantly ESAB blew past analysts’ revenue expectations this quarter. We were also glad its organic revenue outperformed Wall Street’s estimates. Overall, we think this was a solid quarter with some key areas of upside. The stock remained flat at $121.14 immediately after reporting.

Updated: December 4, 2025 at 10:23 PM EST

A common mistake we notice when investors are deciding whether to buy a stock or not is that they simply look at the latest earnings results. Business quality and valuation matter more, so we urge you to understand these dynamics as well.

ESAB isn’t a terrible business, but it isn’t one of our picks. To kick things off, its revenue growth was uninspiring over the last four years. And while its strong operating margins show it’s a well-run business, the downside is its flat organic revenue disappointed. On top of that, its cash profitability fell over the last five years.

ESAB’s P/E ratio based on the next 12 months is 19.3x. This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're pretty confident there are superior stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $141.55 on the company (compared to the current share price of $113.30).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.