Low-Carbon Hydrogen Projects With Dow Will Enhance Future Operational Efficiency

Key Takeaways

• Linde's strategic investments and project backlog position it for strong revenue and earnings growth, even amid varying economic conditions.
  
• Cost reduction, stock repurchases, and capital discipline are anticipated to improve margins and enhance earnings per share.
  
• Global economic weakness and geopolitical tensions threaten Linde's revenue, with stagnation risks, project delays, and restructuring indicating profitability challenges.

Catalysts

Operates as an industrial gas company in the Americas, Europe, the Middle East, Africa, Asia, and South Pacific.

• Linde's major $2 billion investment in a low-carbon hydrogen project with Dow creates a significant opportunity for future growth, enhancing project backlog and supporting revenue and earnings through long-term contracts.
  
• The company is undertaking proactive, targeted cost reduction initiatives, expected to improve net margins and deliver full run-rate savings in the latter half of next year, driving operational efficiencies.
  
• Linde's substantial $10 billion project backlog, including its largest sale of gas project in company history, provides a strong platform for secured, contractual growth irrespective of economic conditions, thus bolstering future revenue and earnings.
  
• The electronics sector is poised for sequential growth, driven by project backlog ramp-ups and normalization of inventory destocking, which should positively impact future revenues despite the current slow recovery pace.
  
• Linde continues robust stock repurchase activity, which, in combination with disciplined capital management and cost-efficiency measures, is expected to enhance earnings per share regardless of macroeconomic uncertainties.

Linde Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Linde's revenue will grow by 5.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 19.3% today to 22.2% in 3 years time.
• Analysts expect earnings to reach $8.6 billion (and earnings per share of $18.83) by about December 2027, up from $6.4 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $7.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 32.4x on those 2027 earnings, up from 32.1x today. This future PE is greater than the current PE for the US Chemicals industry at 21.5x.
• Analysts expect the number of shares outstanding to decline by 1.37% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.39%, as per the Simply Wall St company report.

Linde Future Earnings Per Share Growth

Risks

• Continued economic weakness globally, particularly in EMEA and parts of APAC, including China, poses a threat to Linde's industrial-related end markets, which could negatively impact revenue and profit margins.
  
• The company's expectation of an economic contraction and lack of near-term catalysts to reverse ongoing sluggish industrial activity may adversely affect future base volumes, leading to stagnation in revenue growth.
  
• High dependence on significant projects like the Dow Chemical collaboration, which have long timelines before contributing to earnings, introduces risk due to potential delays or economic shifts before project completion, affecting future earnings forecasts.
  
• Geopolitical tensions and regulatory uncertainty, particularly around low carbon and renewable hydrogen projects, pose potential disruptions or cancellations, impacting anticipated project revenues and profitability.
  
• Workforce reductions and restructuring charges, while aimed at cost savings, reflect underlying weaknesses and potential margin pressure, signaling risks to sustaining current levels of profitability without external economic improvement.

Valuation

• The analysts have a consensus price target of $493.57 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 $550.0, 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 2027, revenues will be $38.7 billion, earnings will come to $8.6 billion, and it would be trading on a PE ratio of 32.4x, assuming you use a discount rate of 7.4%.
• Given the current share price of $430.2, the analyst's price target of $493.57 is 12.8% 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.