Linde plc

Date: June 21, 2024.

Company’s Overview

Linde plc (LIN) is the world’s largest industrial gas company by market share. They operate globally and supply industrial, process, and specialty gases for various industries, including healthcare, manufacturing, and electronics. Their products include atmospheric gases like oxygen, nitrogen, and argon, as well as process gases like hydrogen, helium, and carbon dioxide.

Competition

Linde plc operates within the Industrial Gases industry, which is composed by:

Revenue Segments

The Company’s net sales proportions by segment for the most recent quarterly report are composed by:

The Company’s Comparison of total net revenues by segment from 2019 till 2023:

Related Risks

The road ahead for Linde plc is not without its challenges. The cyclical nature of their business means demand for industrial gases can fluctuate based on the health of manufacturing and other end-user industries. They face the volatility of commodity prices for the raw materials used in production, impacting their profitability. Navigating a heavily regulated environment with the potential for changes in regulations affecting their operations is another hurdle. Geopolitical tensions can disrupt supply chains or lead to trade restrictions, hindering their ability to source materials or deliver products to customers.

Financial Performance

Revenues

Revenues from 2020 to 2023:

• LIN’s annual revenue for 2023 was $32.854B, a -1.53% decrease from 2022.
• LIN’s annual revenue for 2022 was $33.364B, a 8.35% increase from 2021.
• LIN’s annual revenue for 2021 was $30.793B, a 13.03% increase from 2020.
• LIN’s annual revenue for 2020 was $27.243B, a -3.49% decrease from 2019.

The yearly revenue from 2009 till 2023 is:

**The 2024 and 2025 values are the expected by the analysts

Net Income

Net Income from 2020 to 2023:

• LIN’s annual net income for 2023 was $6.199B, a 49.48% increase from 2022.
• LIN’s annual net income for 2022 was $4.147B, a 8.39% increase from 2021.
• LIN’s annual net income for 2021 was $3.826B, a 52.98% increase from 2020.
• LIN’s annual net income for 2020 was $2.501B, a 9.45% increase from 2019.

The yearly net income from 2009 till 2023 is:

**The 2024 and 2025 values are the expected by the analysts

EPS

EPS from 2020 to 2023:

• LIN’s annual EPS for 2023 was $12.7B, a 53.01% increase from 2022.
• LIN’s annual EPS for 2022 was $8.3B, a 12.16% increase from 2021.
• LIN’s annual EPS for 2021 was $7.4B, a 55.79% increase from 2020.
• LIN’s annual EPS for 2020 was $4.75B, a 12.56% increase from 2019.

The yearly EPS from 2009 till 2023 is:

**The 2024 and 2025 values are the expected by the analysts

Free Cash Flow

Free Cash Flow from 2020 to 2023:

• LIN’s annual free cash flow for 2023 was $5.518B, a -3.04% decrease from 2022.
• LIN’s annual free cash flow for 2022 was $5.691B, a -14.28% decrease from 2021.
• LIN’s annual free cash flow for 2021 was $6.639B, a 64.78% increase from 2020.
• LIN’s annual free cash flow for 2020 was $4.029B, a 60.77% increase from 2019.

The yearly free cash flow from 2009 till 2023 is:

**The 2024 and 2025 values are the expected by the analysts

Financial Strength

Shares Outstanding

On February 28, 2022, LIN’s board authorised a share repurchase program of up to $10B of its common shares.

The positive aspect is the decrease in shares outstanding (almost 12% since 2019). This reduces the number of shares competing for profits, potentially leading to higher earnings per share (EPS) in the future.

Assets/Liabilities

Their asset-to-liability ratio of 2.0 sits comfortably above the desired level, indicating a healthy buffer of assets compared to their debts. This financial cushion provides them with flexibility to invest in growth initiatives and weather economic challenges.

Current Ratio

However, their current ratio of 0.91 falls just below the recommended level of 1. This suggests their current assets (like cash and inventory) might not be quite enough to comfortably cover their short-term liabilities (like accounts payable) in the short term. While not a critical issue yet, it could potentially limit their ability to meet short-term obligations without needing additional borrowing or asset sales.

Net Debt

Their net debt of $15.6 billion is a manageable amount, especially considering their size. The 27.95% increase since 2019 is a moderate rise, and the net debt constitutes a reasonable portion (around 39%) of their total liabilities. This indicates they haven’t relied excessively on debt financing.

Valuation

Based on the analysis performed, LIN’s price is significantly overvalued. As key metrics, we considered 9% Required Rate of Return (RRR) and 20% margin of safety. Note that in the analysis we take into consideration also the cash and cash equivalents and the total debt.

The company has received a range of ratings from buy to sell. Specifically, there were 18 buy, 3 overweight, 9 hold, 1 underweight and 0 sell ratings. The consensus rating leans toward overweight.

Linde plc stands out as a leader in the industrial gas industry. Their impressive financial performance is evident in their strong revenue growth (10-year CAGR of 10.35%) and exceptional profitability metrics. Their industry-leading gross margin (47.26% vs 32.64% median) and net margin (19.26% vs 8.97% median) showcase their operational efficiency. They’ve also demonstrated a commitment to shareholder value by reducing shares outstanding (almost 12% decrease) and achieving a decent EPS growth (10-year CAGR of 8.28%). Their financial strength is decent, with a good asset-to-liability ratio (2.0) but a concerningly low current ratio (0.91). While their net debt is manageable (around 39% of liabilities) and has seen a moderate increase, addressing their short-term liquidity would solidify their financial position.

However, the major concern lies in their overvalued stock (P/E ratio of 33.43 vs industry median of 24.35). The market might be overly optimistic about future growth prospects, potentially leading to a price correction. Additionally, their ROIC (8.22%) falls below our investment threshold. While they pay a decent dividend, the high payout ratio (45% of free cash flow) suggests limited resources for future growth investments.

Overall, Linde plc presents a compelling case for operational excellence. Their industry leadership, exceptional profitability, and commitment to shareholders are strong positives. However, the overvalued stock price and potential liquidity concerns require careful consideration. Investors seeking financially strong companies with a reasonable valuation might want to consider other options. For those comfortable with some risk and believe in Linde’s future potential, the company could be an option, but thorough due diligence and a clear understanding of the valuation are crucial before investing.

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Disclaimer

Please note that I am not a licensed financial advisor and the information provided here should not be construed as financial advice. I am simply sharing my understanding of the topics based on my research and personal experiences. It is always advisable to consult with a qualified financial advisor before making any investment decisions.

The information I provide is based on publicly available sources and my own interpretations. I strive to provide accurate and up-to-date information, but I cannot guarantee the correctness or completeness of the information.

Any opinions expressed here are my own and do not necessarily reflect the views of any other individual or organisation.

Please use your own judgement and conduct your own research before making any investment decisions.