Gas Contracts And Clean Energy Will Secure Future Stability

Key Takeaways

• Strategic investments in clean energy and long-term contracts are expected to drive sustainable revenue and profit growth.
  
• Productivity improvements and disciplined capital allocation are anticipated to enhance operational efficiency and shareholder value.
  
• Economic uncertainty, trade policy volatility, and sluggish industrial activity pose risks to Linde's revenue growth, pricing strategies, and future earnings.

Catalysts

Operates as an industrial gas company in the United States, China, Germany, the United Kingdom, Australia, Mexico, Brazil, and internationally.

• Linde's significant backlog of $10 billion, with over $7 billion from sale of gas projects secured by long-term contracts, is expected to drive future earnings growth through stable contractual returns. This will positively impact future revenue and profit stability.
  
• The company is positioned to benefit from the growth in electronics, particularly in South Korea, driven by their relationship with key customers like Samsung, which should enhance revenue streams in the coming years.
  
• There is increased focus on productivity improvements, including the use of AI for process optimization, which is expected to enhance margins by reducing costs and increasing operational efficiency.
  
• Linde's strategic investments in clean energy, including low-carbon hydrogen projects, supported by U.S. government tax credits (45Q), are expected to drive long-term growth. This will help support future revenue and margin expansion.
  
• The company’s disciplined capital allocation, with increased dividend payouts and substantial stock buybacks, is anticipated to drive EPS growth by enhancing shareholder value over time.

Linde Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Linde's revenue will grow by 4.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 20.0% today to 22.8% in 3 years time.
• Analysts expect earnings to reach $8.7 billion (and earnings per share of $19.16) by about May 2028, up from $6.6 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $7.4 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 31.4x on those 2028 earnings, down from 31.8x today. This future PE is greater than the current PE for the US Chemicals industry at 20.2x.
• Analysts expect the number of shares outstanding to decline by 1.95% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.72%, as per the Simply Wall St company report.

Linde Future Earnings Per Share Growth

Risks

• The uncertainty and volatility in global trade policies could dampen industrial activity, leading to lower base volumes and potentially impacting Linde's future revenues.
  
• Economic conditions remain guarded, with management highlighting recessionary conditions that could result in approximately 2% EPS headwind from lower volumes, affecting earnings.
  
• Sluggish industrial activity, particularly in Western Europe and China, is expected to drag down base volumes, posing a risk to revenue growth in key segments.
  
• The potential for high inflation and continued tariff headwinds may create an uncertain environment that impacts the predictability of Linde's pricing strategies, affecting net margins.
  
• Uncertain economic recovery timelines and the delayed contribution of large projects, such as those related to clean energy, may challenge Linde’s capital allocation strategies and projected EPS growth.

Valuation

• The analysts have a consensus price target of $491.572 for Linde 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 $540.0, and the most bearish reporting a price target of just $381.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $38.0 billion, earnings will come to $8.7 billion, and it would be trading on a PE ratio of 31.4x, assuming you use a discount rate of 7.7%.
  
• Given the current share price of $447.05, the analyst price target of $491.57 is 9.1% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.