ESAB (ESAB)

Welding and cutting equipment manufacturer ESAB (NYSE:ESAB) announced better-than-expected revenue in Q1 CY2025, but sales fell by 1.7% year on year to $678.1 million. Its non-GAAP profit of $1.25 per share was 3.6% 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 sales performance is one signal 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 2.9% compounded annual growth rate over the last three years. This fell short of our benchmarks 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 annualized revenue growth of 1.9% over the last two years aligns with its three-year trend, suggesting its demand was consistently weak.

ESAB also reports 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 2.8% year-on-year growth. Because this number aligns with its normal revenue growth, we can see the company’s core operations (not acquisitions and divestitures) drove most of its results.

This quarter, ESAB’s revenue fell by 1.7% year on year to $678.1 million but beat Wall Street’s estimates by 2.2%.

Looking ahead, sell-side analysts expect revenue to grow 1.1% over the next 12 months, similar to its two-year rate. This projection doesn't excite us and suggests its newer products and services will not catalyze better top-line performance yet.

ESAB’s gross margin is good compared to other industrials businesses and signals it sells differentiated products, not commodities. As you can see below, it averaged an impressive 36% gross margin over the last four years. Said differently, ESAB paid its suppliers $64.05 for every $100 in revenue.

In Q1, ESAB produced a 37.6% gross profit margin, in line with the same quarter last year. Zooming out, ESAB’s full-year margin has been trending up over the past 12 months, increasing by 1.2 percentage points. If this move continues, it could suggest better unit economics due to some combination of stable to improving pricing power and input costs (such as raw materials).

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

ESAB has been an efficient company over the last four years. It was one of the more profitable businesses in the industrials sector, boasting an average operating margin of 14.2%. This result isn’t too surprising as its gross margin gives it a favorable starting point.

Analyzing the trend in its profitability, ESAB’s operating margin rose by 3.7 percentage points over the last four years, as its sales growth gave it operating leverage.

In Q1, ESAB generated an operating profit margin of 16.2%, in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.

Revenue trends explain a company’s historical growth, but the change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

ESAB’s EPS grew at a decent 9.5% compounded annual growth rate over the last two years, higher than its 1.9% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

We can take a deeper look into ESAB’s earnings to better understand the drivers of its performance. While we mentioned earlier that ESAB’s operating margin was flat this quarter, a two-year view shows its margin has expanded by 2.9 percentage points. This was the most relevant factor (aside from the revenue impact) behind its higher earnings; taxes and interest expenses can also affect EPS but don’t tell us as much about a company’s fundamentals.

In Q1, ESAB reported EPS at $1.25, down from $1.27 in the same quarter last year. Despite falling year on year, this print beat analysts’ estimates by 3.6%. Over the next 12 months, Wall Street expects ESAB’s full-year EPS of $5.25 to grow 2.6%.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because 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 8.7% over the last four years, better than the broader industrials sector.

Taking a step back, we can see that ESAB’s margin expanded by 3.1 percentage points during that time. This is encouraging because it gives the company more optionality.

ESAB broke even from a free cash flow perspective in Q1. The company’s cash profitability regressed as it was 5.4 percentage points lower than in the same quarter last year, prompting us to pay closer attention. Short-term fluctuations typically aren’t a big deal because investment needs can be seasonal, but we’ll be watching to see if the trend extrapolates into future quarters.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Although ESAB hasn’t been the highest-quality company lately because of its poor revenue and EPS performance, it historically found a few growth initiatives that worked. Its five-year average ROIC was 12.2%, higher than most industrials businesses.

ESAB reported $291.3 million of cash and $1.07 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 $527.5 million of EBITDA over the last 12 months, we view ESAB’s 1.5× net-debt-to-EBITDA ratio as safe. We also see its $34.5 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 enjoyed seeing ESAB beat analysts’ EBITDA expectations this quarter. We were also glad its revenue outperformed Wall Street’s estimates. Overall, we think this was a decent quarter with some key metrics above expectations. The stock traded up 4.1% to $125.10 immediately following the results.

Updated: July 10, 2025 at 11:36 PM EDT

Are you wondering whether to buy ESAB or pass? We urge investors to not only consider the latest earnings results but also longer-term business quality and valuation as well.

ESAB’s business quality ultimately falls short of our standards. To kick things off, its revenue growth was weak over the last three years, and analysts don’t see anything changing over the next 12 months. And while its rising cash profitability gives it more optionality, the downside is its projected EPS for the next year is lacking. On top of that, its organic revenue growth has disappointed.

ESAB’s P/E ratio based on the next 12 months is 23.8x. This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think other companies feature superior fundamentals at the moment.

Wall Street analysts have a consensus one-year price target of $133 on the company (compared to the current share price of $128.22).