ESAB Corporation: Hold Rating Due to Uncertainty in Americas Demand Recovery

ESAB Corporation: The company's demand recovery in the Americas is uncertain, leading to a hold rating. The Americas account for the majority of ESAB's revenue, with Mexico being a significant contributor. The company's long-term growth outlook is positive due to its compounder strategy, but the near-term risk/reward is balanced.

ESAB Corporation (NYSE: ESAB), a leading global provider of fabrication technology and gas control solutions, reported its second-quarter (2Q25) results on August 6, 2025. The company's performance was mixed, with GAAP revenue exceeding expectations but facing significant headwinds in the Americas region, particularly Mexico. Despite these challenges, ESAB's long-term growth outlook remains positive due to its strategic compounder model.

Q2 2025 Financial Highlights

ESAB's 2Q25 GAAP revenue reached $715.6 million, surpassing analyst estimates by $41.48 million, or 6.15% [2]. Core adjusted EBITDA margin hit a record 20.4%, up 30 basis points (bps) year-over-year (y/y), driven by strong execution and margin improvements [2]. Management raised its full-year 2025 guidance for core adjusted EBITDA and core adjusted EPS, reflecting contributions from recent acquisitions and robust performance in the EMEA and Asia-Pacific regions [2].

Demand Recovery in the Americas

The Americas segment, which includes North and South America, saw a 9% y/y decline in total sales, with a 7% organic decline driven by an 11% volume drop [1]. The primary headwind was new tariffs introduced in April, creating a significant volume headwind of ~500 bps, particularly affecting local customers in Mexico [1]. This uncertainty led to order deferrals and a "wait-and-see" approach, impacting both direct sales and automation project orders [1].

Management expressed confidence in a 2H25 automation rebound but acknowledged a more gradual recovery in Mexico [1]. Despite this, they guided for a low single-digit decline for the Americas segment in 2H25, indicating the headwind from Mexico remains significant [1]. This uncertainty has led to a cautious market view, with the stock falling 17% after the earnings announcement [1].

Long-Term Growth Outlook

ESAB's long-term growth outlook remains positive due to its compounder strategy, which combines organic growth initiatives with accretive acquisitions [1]. Recent acquisitions, such as DeltaP and Aktiv, have expanded ESAB's total addressable market by $200 million and positioned it as a world-class provider of medical gas control products [1]. The company's strategic focus on high-growth regions and digital capabilities further supports its long-term growth prospects.

Valuation and Outlook

ESAB's valuation has reset to its two-year average, with the forward price-to-earnings (P/E) multiple reversing from ~23x to 20x [1]. The stock is expected to trade sideways until there is greater visibility on the timing of recovery, particularly in Mexico. A clearer inflection in demand would be the key trigger for a re-rating.

Conclusion

ESAB Corporation faces near-term uncertainty in demand recovery in the Americas, particularly Mexico, due to tariffs and order deferrals. However, the company's long-term growth outlook remains positive, supported by its strategic compounder model and robust pipeline of opportunities. With valuation now at its two-year average, investors should maintain a hold rating for ESAB until there is greater clarity on the timing of recovery.

References

[1] Seeking Alpha. "ESAB Corporation: Uncertainty of Timing of Demand Recovery in the Americas." https://seekingalpha.com/article/4813977-esab-corporation-uncertainty-of-timing-of-demand-recovery-in-the-americas

[2] AOL Finance. "ESAB: ESAB Q2 Revenue Jumps." https://www.aol.com/finance/esab-esab-q2-revenue-jumps-231851874.html