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No. of Recommendations: 4
blesto:

"I can see where Lincoln Electric Holdings, Inc. (NASDAQ:LECO) fits into your philosophy. A manufacturer & reseller of welding and cutting products.
At first one might say "Yawn" but after looking at their initial stats
http://caps.fool.com/Ticker/LECO/Stats.aspx?source=icasittab......
I can see how they could be an intriquing investment."


I've actually done quite a bit of work on LECO. It's an inspiring business, one that I'd be happy to own, but not at these prices. I think its fairly valued at these levels but get pretty interested in the mid $40s. Given that it's so tied to the global economy I'm confident we'll have a better opportunity to pick up shares at more depressed levels. I'm content to wait until people hate manufacturing again :)

A while back we were discussing Great CEOs here at Fool HQ. Stropki was my candidate. Here's an excerpt of the analysis I did a few months ago:

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Background and Timeline

John M. Stropki is Chairman, President and Chief Executive Officer of Lincoln Electric, a 115-year-old Ohio-based manufacturing company. Just shy of 60, Stropki was born in Cleveland, educated in Indiana and has never had a job outside of Lincoln Electric. He sits on the board of publicly traded Sherwin Williams, based in Cleveland, and would rather have a cold Bud-Light and a greasy sandwich from Slyman’s Restaurant (a Cleveland gem) than a fancy dinner out. It would be easy to think he has never left the Midwest. With a blue collar, calloused hands and constant references to “hard work,” John Stropki is the perfect face of a rust belt manufacturer that is fighting for its life in a world of cheap labor and high technology. But just as there is more to the company that has survived and thrived since 1895, there is more to the man that has guided their recent dominance and navigated the worst economic downturn since the days of Lincoln Electrics founders manned the post.

Path to Greatness

John M. Stropki Jr. was born in Mayfield Heights (just outside of Cleveland), Ohio. He would eventually end up 300 miles away at Purdue University with in pursuit of a degree in Industrial Engineering. Coming from parents of modest means and classic Midwestern values, the privilege of obtaining a college education had a cost – a significant one for an out-of-stater like Stropki (even in those days college wasn’t cheap). Needing a job to help pay for his education, Stropki heard of Lincoln Electric through a neighbor. Intrigued as much by the technical aspects of Lincoln’s manufacturing business as by their unique pay structure, he got hired in their shipping department as a summer employee.

The culture of hard work, accountability and trust fit with Stropki’s upbringing. As he recalls, “I was 19 years old, and I was working as part of a team with six or seven other people – some of whom are still here, by the way – who were feeding their families doing the same job I was doing. I made the exact same wage for the exact same output they made. I was not limited by being the new employee or the summer employee.” In the summer of 1969 he ended up making $10-$11 an hour at a time when other college students were making $2 an hour. “If I worked hard, I made a lot of money; if I didn’t, I didn’t make a lot of money.” Each summer thereafter, Stropki returned to Lincoln Electric until he was hired full-time as a sales trainee in 1972.

From the 40 years since his summer job days in 1969 John Stropki has held or been exposed to virtually every job at every location at Lincoln Electric. After working his way up to a district manager position, Stropki was named National Sales Manager of Canada in 1992. From there, his ascent to Chief Operating Officer in 2003 happened fairly quickly. Only a year later, he was called upon to be only the seventh CEO in the company’s 100-plus year history. The task: manage a multi-billion dollar company with 37 factories in 18 countries on five continents, 9,000 employees and a culture steeped in history.

Along the way Stropki earned his MBA from Indiana University. Today, he lives in Solon, Ohio with his wife Liz, just a short drive to Lincoln Electric headquarters. His two children, John Michael and Suzanne, have grown and married.

Quantitative Results

Since 2004, the year John Stropki became CEO of Lincoln Electric, operational performance has been remarkable. Considering sales were down 30 percent in 2009, the largest decline in well over a decade and the first sales decline since 2001, Stropki has led Lincoln Electric admirably over his six year tenure. Knowing that the underlying business is heavily dependent on the economic and industrial cycles, looking at measures of efficiency and controllable expenses help show how his leadership has translated to the business.

======================================================================
3-Yr Average 5-Yr Average 6-Yr Average
Before Stropki Before Stropki Under Stropki

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Operating Expense % 19.9% 20.1% 17.6%
Total Asset Turnover 1.1x 1.2x 1.3x
Annual FCF (MM) $85 $87 $75
======================================================================

Even in the face of the Great Recession Stropki has increased efficiency at Lincoln Electric. He has driven costs out of the business, improved asset utilization and maintained free cash flow generation. These financial achievements have played out in the company’s stock price, which has obliterated the performance of the S&P 500. Over the 6 and a half (just shy) year period, LECO stock has returned a cumulative 142 percent return versus a one percent return for the S&P 500. On an annualized basis, LECO stock has grown at a compound rate of 14.9 percent versus a growth in the S&P 500 of 0.1 percent per year.

Qualitative Results

Strategically, Stropki has furthered Lincoln’s presence abroad, gaining market share in each region the company operates. He has led the most ambitious and broad-based expansion in the company’s history by constructing or expanding over a dozen plants around the world. He has also successfully led the acquisition of (or joint ventures with) nearly a dozen companies – primarily abroad.

An increased focus on automation welding and robotic welding has reinvigorated innovation too. In fact, Lincoln Electric has announced almost 110 products in the past year. Spending on research and development has increased each year, and by 44 percent since Stropki took control.

Efficiency is at the heart of Stropki’s management style. He has rolled out Six Sigma initiatives to improve product quality and efficiency of operations, domestically and abroad.

Business Tenets

Loyalty

“We recognize that, as a group, we succeed or fail.”
For over 40 years, and the entirety of his working life, John Stropki has never worked for any company other than Lincoln Electric. Over his years he has worked in every department and at many locations. His commitment to the company has been matched only by his commitment to his community. Born and raised in Cleveland it is only natural for Stropki to live and work there. He also supports his local community by working with the city to attract new businesses. Stropki has also shown incredible loyalty to the employees at Lincoln Electric, successfully navigating the Great Recession while keeping the company’s Guaranteed Employment policy afloat and continuing to generously share profits.

Hard Work

“Success is driven by your effort and energy, not by external factors.”
Stropki exemplifies the blue collar nature of the Midwestern manufacturing company he leads. After working for 40 years at the same company he is showing no signs of slowing. Currently, Stropki spends over half of his time traveling – visiting facilities abroad and learning about the cultures and customers in foreign markets. He loves the fact that when times are tough, he sees more cars in the parking lot on Saturday than there was on Friday as salaried workers put in the effort to put the hourly folk back to work – but the point is that Stropki sees this because he is at work on Saturday. Another testament to his hard work is the fact that, while the company has grown considerably over the past six years, Stropki’s golf handicap has not improved at all.

Learn

“You have to really be objective in looking at the organization and recognize that sometimes you’ve been successful despite yourself, and the weaknesses that are inherited in the organization are still there. Don’t overlook the weaknesses or the opportunities that you have, and really continue to stretch the element of that.”

Aside from earning a demanding engineering degree during his undergraduate education and an MBA from Indiana, Stropki is an avid reader. Lately, he has been reading books on emerging markets and cultural and economic issues facing developing countries. This fact fits nicely with the acquisition strategy he has set for Lincoln: partner, learn, buy. During the 1980s and 1990s Lincoln Electric engaged in several failed international acquisitions that eventually led to the selling-off of money-losing operations. The blunder forced the company to take out a $230 million loan. These lessons taught Stropki a better way to pursue international expansion.

Lead by Example

During a recent visit to a Mexican factory Stropki had some down time. Instead of taking a rest or chatting up management, he hit the factory floor, donned gloves and a mask, and went to work with a 1,000 pound metal-fusing torch (capable of generating heat of more than 6,500 degrees). Few CEOs have such a deep and intimate knowledge of their products and uses. Constantly talking about quality control and accountability, Stropki readily takes blame as well. He is quick to note that when a worker isn’t performing it “represents a failure of management.” Managers should “put every ounce of energy you have into making that person better.” Finally, Stropki shares in the pain of the business down cycle. When he asks his employees to reduce hours and take a hit to income, they see his income declining as well. While Stropki made $4.6 million in 2009, he took two rounds of pay cuts (totalling10 percent) and had his bonus slashed nearly in half. He also made only 65 times the average worker at Lincoln Electric, where most CEOs make several hundred times their average worker.

Bryan
TMF42
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