AIQUF - L'Air Liquide Vs. Linde: Which Is The More Attractive For Long-Term Investors Right Now?

Summary

• L'Air Liquide and Linde are two of the largest industrial gas companies in the world, with attractive industry dynamics, high profit margins, and excellent returns on capital.
• Both companies have been investing in hydrogen infrastructure which is expected to become a significant growth area for both companies.
• We share which company we believe is more attractive at current prices for long-term investors.

L'Air Liquide ( AIQUY ) and Linde ( LIN ) are two of the largest industrial gas companies in the world. L'Air Liquide is French, while Linde is headquartered in Ireland. They both benefit from operating in an attractive industry, which has very favorable dynamics for a number of reasons. First, industrial gases typically account for only a very small percentage of the customer's costs, but they are a critical input. As such, reliability is more important than price in most cases. Second, there are high switching costs for customers to change suppliers, and it is also common for them to sign long-term supply contracts. This combination of high value to price, and significant switching costs, contribute to the competitive moats of both companies, allowing them to have high profit margins and earn excellent returns on capital.

Another thing to like about these companies is that they are quite stable and less affected by the cyclicality of the economy compared to others. Historically both companies have delivered solid results, but Linde has managed to outperform the S&P 500 index ( SPY ) in the last ten years by a small margin, while L'Air Liquide has underperformed.

Performance Targets

L'Air Liquide has a CAGR sales growth target of +5-6% and a return on capital employed of more than 10% starting in 2023. Linde has not been that specific with their financial performance objectives, but in its most recent earnings call management said they feel confident in delivering 10 plus percent EPS growth over the next several years.

One thing to note is that Linde's EPS has been more volatile, for example its earnings took a big hit during the worst of the Covid crisis, while L'Air Liquide's earnings remained more stable. That said, in the past ten years Linde has grown its earnings per share at a slightly faster pace, but much of it was thanks to the synergies resulting from its merger with Praxair.

Some of the growth differences can also be explained by their different geographic exposures. L'Air Liquide has a stronger market share in Europe, which is its primary market, while Linde is more diversified in terms of geography and has a strong presence in North America and Asia.

Hydrogen Strategy

Both companies have been investing in hydrogen infrastructure for some time, but the Inflation Reduction Act has accelerated very significantly the growth potential for this part of the business. Linde is estimating that it could make more than $20 billion of potential investments in the coming years, with some of the larger ones related to blue and green hydrogen and blue ammonia. Meanwhile, L'Air Liquide aims to triple its hydrogen sales by 2035. Needless to say, hydrogen is going to become one of the most important growth areas for both companies.

Financials

After its merger with Praxair, Linde became the largest industrial gases company in the world by revenue, surpassing L'Air Liquide. It is difficult to compare their revenue growth as much of Linde's is the result of that merger, but it is clear that both companies are growing sales at a similar rate and that growth has accelerated recently.

While L'Air Liquide has significantly higher gross profit margins, they both have relatively similar operating margins. For industrial companies these close to 20% operating margins are excellent, and the result of the competitive moats both companies have.

Balance Sheet

Both companies carry a similar amount of long-term debt, but Linde is slightly less leveraged as it has a higher EBITDA.

Dividend Yield and Dividend Growth

L'Air Liquide currently has a slightly higher dividend yield at ~1.8% compared to Linde's ~1.4%. Both companies have an impressive track record of growing their dividends for several decades. Linde's dividend has been growing more quickly in recent years, but L'Air Liquide's +8.3% 30 year CAGR is quite respectable. Interestingly, L'Air Liquide has a program to reward long-term shareholders by increasing the dividend by 10% after two years, but if we understand correctly shares have to be held directly.

Valuation

In the past ten years Linde has been consistently valued at higher valuation multiples compared to L'Air Liquide. We believe, however, that the difference is too significant at the moment, with Linde trading with an EV/Revenue multiple about two turns higher.

Similarly, Linde is trading with an EV/EBITDA about 5 turns higher compared to L'Air Liquide, and about 4 turns higher compared to its own ten year average.

L'Air Liquide is currently trading at only a slight premium to its ten year average price/earnings ratio, while Linde is trading at almost a 50% premium. The Non-GAAP forward p/e ratio for Linde is roughly 27x, while that of L'Air Liquide is ~23x. Seeking Alpha gives Linde an 'F' valuation grade, while it gives L'Air Liquide a 'D-' note.

Based on our estimates for future earnings we calculate a fair value for Linde of $295 per share, which implies a ~10% overvaluation. For L'Air Liquide we estimate a fair value of ~$33 for the ADRs, which implies a slight undervaluation of ~6%. We use a 9% discount rate in both cases.

The Verdict

At the moment we believe L'Air Liquide to be the better option for long-term investors, given the more attractive valuation and higher dividend yield. It also has shown more stability in its financial results. That said, Linde has been growing its dividend at a faster rate in recent years, has more exposure to faster growing geographies, and has slightly less leverage.

Risks

Both companies are exposed to regulatory risks that could increase their costs, and being international companies they also have currency risks. They both have significant debt, which could make them more vulnerable to economic downturns. Still, we consider both companies to be very resilient and more defensive than the average company.

Conclusion

L'Air Liquide and Linde are two leading industrial gas companies that greatly benefit from operating in a favorable industry, and both have strong competitive moats. Both companies are also investing in hydrogen infrastructure for future growth. They both have a strong track record of growing dividends for shareholders. Linde has outperformed L'Air Liquide in the past decade, but L'Air Liquide currently has a higher dividend yield and a more attractive valuation.

For further details see: