2024-01-14 08:01:31 ET
Summary
- Linde plc operates in the industrial gases and engineering sector, providing essential gases for various industries.
- Despite a decrease in sales, Linde's Q3 profit margin increased through strategic actions and lowered costs.
- Linde's investment in a new hydrogen plant showcases their commitment to innovation, sustainability, and economic growth.
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Investment Thesis
In my analysis, I'll demonstrate why Linde plc (LIN) is not just weathering the economic storm but thriving within it. My focus is on the company's remarkable resilience and its prudence in chasing growth even when the headwinds are strong. The strong numbers are enticing alone, but they only tell part of the story. Beyond the balance sheets and valuation metrics lies a testament to Linde's innovative spirit and strategic foresight, elements I believe position it as a formidable player in the industrial gases sector. I see LIN as a strong buy from a long-term outlook.
Introduction
Linde plc operates in the industrial gases and engineering sector, providing a wide range of products and services related to the production, distribution, and application of gases used in various industries. LIN plays a crucial role in supplying essential gases like oxygen, nitrogen, and hydrogen to support diverse applications, including manufacturing, healthcare, and energy production. LIN's commitment to innovation and sustainability reflects their ongoing efforts to contribute positively to the industries they serve while adapting to evolving market demands and environmental considerations.
Financials
I've been closely monitoring Linde's recent financial performance, and I believe the company has demonstrated a considerable amount of resilience in the face of economic headwinds. Looking at Linde's Quarter 3 2023 Earnings Call , I found plenty of reasons to believe that this industrial gases and engineering giant is poised for an impressive run in the near future.
Q3 '22, '23 Statement of Income (SEC Filing)
Profit Margin Increase
First, Linde reported sales of $8.2 billion for the third quarter of 2023 compared to $8.8 billion in 2022. Now, a 7% decrease from the previous year might initially raise eyebrows, but their Q3 profit margin increased from 14.5% in 2022 to 19.2% in 2023. This increase was achieved through strategic price actions, lowered costs, and fixed payment contracts. Excluding cost pass-through, Linde managed to expand operating margins by 400 basis points across all business segments. LIN has an overall positive trend in terms of profit margin, which bodes well for the company in general but especially for the stock itself.
Pricing
Taking a closer look at the stock, the price increased by 38.1% year-over-year. This is part of an overwhelmingly positive historical trend, marking the company as an Apple-esque stock insofar as we have yet to witness significant, sustained price blows.
Volume, EPS, and Capex
Investors may be reasonably concerned that volumes remained flat and decreased by 2% year-over-year, particularly due to the electronics, metals, and mining sectors. This volume decline is primarily driven by existing customers requiring fewer gas refills because their production scaled back in sync with their local economies. In other words, this is a temporary stall in demand and should not worry investors in the long-run.
EPS grew by 26%, continuing LIN’s trend of double-digit percent EPS growth, and Capex saw a 24% increase. The significant Capex was mainly geared towards supporting a $4.5 billion sale of gas backlog, reinforcing Linde's commitment to long-term growth.
In short, Linde's financial performance is compelling given the current economic volatility of the market. Not only has the company kept pace with the market, but it has also capitalized significantly through a prudent capital management approach. With a new stock repurchase program in the mix, it's evident that Linde is well-prepared to navigate the uncertain times ahead while delivering sustained compound growth.
In my opinion, based on financials alone, this is a strong buy opportunity. I’d like to take a look at a recent project announcement, however, to further expound upon my excitement for the stock.
New Hydrogen Plant
As part of an $83 million growth project , Linde plans to construct a new hydrogen plant in Washington County. This development aligns well with my buy thesis for the company, and here's why.
First, the decision to invest in a new hydrogen plant underscores Linde's commitment to innovation and staying ahead in the industrial gases sector. Hydrogen is increasingly being recognized as a vital element in the transition towards clean energy and sustainable practices. With growing demand from aerospace, electronics, manufacturing, and mobility sectors, Linde is capitalizing early in a testament to its consistent forward-thinking.
A favorable byproduct of this project is, of course, its impact on the local community and economy, which cannot be overstated. Not only does this project create jobs during the construction phase, but it also provides employment for operational roles once the plant is up and running.
Furthermore, Linde's decision to utilize a standardized plant design and domestically sourced equipment is wise and will boost efficiency and cost-effectiveness.
In summary, this project serves as a powerful testament to Linde's vision, strategic acumen, and commitment to growth and sustainability. Overwhelmingly positive financials aside, the hydrogen plant is truly exciting and solidifies my buy thesis.
Risks
There are, of course, potential risks to consider. As I briefly discussed before, one significant concern is the 7% decrease in sales reported in Q3 2023 compared to the previous year. While the profit margins increased, a decline in sales could signal a slowdown in demand or market challenges. Additionally, the flat volumes and a 2% year-over-year decrease, mainly in the electronics, metals, and mining sectors, might raise questions about Linde's ability to adapt to changing market dynamics.
Again, it's important to note that the volume decline is basically attributed to current customers requiring less gas due to temporarily lower demand. Furthermore, Linde's consistent growth in EPS and the strategic Capex investments suggest that they are well-positioned to capitalize on future growth opportunities. Before concluding, I’d like to highlight some key points in the valuation of LIN to emphasize it as a buy opportunity.
Valuation
Sector Relative Grade | LIN | Sector Median | % Diff. to Sector | |
P/E Non-GAAP FWD | D | 28.98 | 16.62 | 74.36% |
P/S FWD | N/A | 6.08 | 1.20 | 405.62% |
P/B FWD | N/A | 5.02 | 2.00 | 151.76% |
Starting with the forward P/E ratio, Linde stands at 28.98, a figure that eclipses the sector median of 16.62. At first glance, the premium price tag may seem steep, but I believe the D grade assigned by Seeking Alpha is a sign that investors expect high growth. This makes sense in the context of new projects like the hydrogen plant in Alabama.
Looking at the forward P/S ratio, Linde's 6.08 stands high above the sector median of 1.20. A high P/S ratio often indicates a company's sales are highly valued by the market, possibly due to superior profitability or potential for future expansion. Linde's offerings aren't mere commodities; they're integral to industries that hinge on precision and reliability. Hence, the higher P/S ratio shouldn’t deter investors but should signal Linde's entrenched market status and its expected scalability.
Finally, the forward P/B ratio of 5.02, with Linde situated higher than the sector median of 2.00, underscores a broader theme of resilience. This ratio isn't just a number, but a reflection of how the market values the net assets of a company. A higher P/B ratio typically suggests that the market expects future profitability to improve and that the company's assets are likely to generate more revenue. In the context of Linde, it speaks to a solid balance sheet, good capacity, and the high value of its industrial gas offerings.
When considering Linde's valuation in the spectrum of its sector, the metrics paint a picture of a company that is priced at a premium — and for good reason. The heftier price tags attached to Linde's shares are a testament to its quality, growth prospects, and the expectation that it will continue to outperform its peers. These metrics reinforce my thesis that Linde is not just another stock to hold, but a strategic asset to buy. With an eye on the long game, Linde's current valuation is a gateway to potential long-term gains, solidifying my stance on the company's bright investment horizon.
Conclusion
In conclusion, while there are risks to consider, the bullish indicators, including profit margin growth, stock performance, and long-term investment plans, make Linde an attractive investment opportunity. It's essential to monitor sales trends and market dynamics, but the company's track record and strategic approach provide confidence in its potential for sustained growth.
For further details see:
Linde: Robust Financials And A New Hydrogen Plant Make It A Strong Buy