Investments In Low-Carbon Hydrogen Will Meet Future Market Demand

Key Takeaways

• Operational restructuring and strategic initiatives are enhancing cost efficiency and net margins, with a focus on future revenue growth through a solid investment pipeline.
  
• Strong positioning in low-carbon hydrogen and energy transition projects supports future expansion, particularly in growing sectors and regions like North America and Asia.
  
• Restructuring and divestment efforts, coupled with dependency on subsidies and regulatory uncertainty, may negatively impact future revenues, net margins, and earnings growth.

Catalysts

Provides gases, technologies, and services for the industrial and health sectors in Europe, the Americas, the Asia Pacific, the Middle East, and Africa.

• The company's significant operational restructuring and efficiency initiatives, such as streamlining the organization and leveraging business service centers, are expected to continue yielding cost savings and efficiency improvements, which would positively impact net margins.
  
• Air Liquide's strong backlog of €4.2 billion consisting of growth investment projects under construction indicates a robust pipeline, expected to drive future revenue growth as these projects come online.
  
• The firm is committed to escalating its operating margin improvement, having raised its margin improvement target from the start of the ADVANCE plan, demonstrating its potential to further enhance net margins through 2026.
  
• Air Liquide's strategic focus on low-carbon hydrogen and energy transition projects, especially in Europe and North America, positions it well for increased demand in decarbonization solutions, anticipating future revenue growth as these markets expand.
  
• Strong investment decisions and strategic positioning in fast-growing sectors such as electronics in Asia and clean energy in multiple geographies are seen as potential catalysts for growth, which are likely to positively impact overall earnings.

L'Air Liquide Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming L'Air Liquide's revenue will grow by 5.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.2% today to 14.8% in 3 years time.
• Analysts expect earnings to reach €4.7 billion (and earnings per share of €8.21) by about March 2028, up from €3.3 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 29.0x on those 2028 earnings, down from 30.9x today. This future PE is greater than the current PE for the GB Chemicals industry at 21.7x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.63%, as per the Simply Wall St company report.

L'Air Liquide Future Earnings Per Share Growth

Risks

• The restructuring efforts in various regions, including Europe, may lead to short-term execution risks and elevated costs that could impact net margins negatively.
  
• The divestment of activities in 12 African countries and the potential softening of demand in Europe due to ongoing restructuring could negatively affect future revenues in the EMEA region.
  
• The dependency on subsidies and regulatory support, notably in energy transition projects, presents a risk if these subsidies are delayed or reduced, impacting both revenue forecasts and earnings growth.
  
• Investment delays related to regulatory uncertainty, particularly in large markets like the U.S. and Europe, may lead to deferred growth, affecting revenue and earnings timelines.
  
• Competitive market conditions and potential delays in decision-making from key customers may impact investment returns in clean energy projects, thereby affecting future overall earnings.

Valuation

• The analysts have a consensus price target of €195.619 for L'Air Liquide based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €220.0, and the most bearish reporting a price target of just €154.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €31.8 billion, earnings will come to €4.7 billion, and it would be trading on a PE ratio of 29.0x, assuming you use a discount rate of 6.6%.
• Given the current share price of €177.58, the analyst price target of €195.62 is 9.2% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.