Over $10 Billion Backlog Will Support Future Expansion In Clean Energy Projects

Key Takeaways

• Strategic focus on clean energy projects and small on-site wins positions Linde for sustained revenue and net margin growth.
  
• Long-term strategy of disciplined capital allocation and digital innovation aims to drive consistent annual earnings and margin improvement.
  
• Fluctuating currencies, regulatory uncertainties, and emerging market risks threaten Linde's revenue growth, profitability, and project timelines despite efforts to manage macroeconomic challenges.

Catalysts

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

• Linde's backlog of over $10 billion, including a record $7 billion in sale of gas projects, positions it to capitalize on future geographical expansion and growth in clean energy projects. This is expected to drive future revenue growth.
  
• The company's strategic focus on small on-site wins, with 59 long-term agreements for 64 plants, enhances its annuity-like growth model, potentially boosting its net margins due to improved network density and reliability.
  
• Management's long-term strategy emphasizes disciplined capital allocation through contractually secured projects, share repurchases, and bolt-on acquisitions, expected to sustain a 10% EPS growth annually, indicating an increase in future earnings.
  
• Linde's initiatives in digital solutions and AI to enhance productivity, price, and cost management underline a commitment to margin expansion regardless of macroeconomic conditions, likely improving its net margins.
  
• The company's strategic positioning in regions with untapped potential for clean energy investments, despite regulatory challenges, sets an optimistic landscape for long-term revenue growth driven by environmental and industrial innovation.

Linde Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Linde's revenue will grow by 4.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 19.9% today to 23.1% in 3 years time.
• Analysts expect earnings to reach $8.7 billion (and earnings per share of $19.28) by about March 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 $7.8 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 32.1x on those 2028 earnings, down from 33.2x today. This future PE is greater than the current PE for the US Chemicals industry at 21.2x.
• Analysts expect the number of shares outstanding to decline by 1.62% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.8%, as per the Simply Wall St company report.

Linde Future Earnings Per Share Growth

Risks

• Fluctuations in foreign exchange rates, especially the significant strengthening of the U.S. dollar, are expected to create headwinds that could negatively impact Linde's earnings by affecting foreign-denominated revenues and profits.
  
• Softening industrial production (IP), particularly in regions like EMEA and sectors like metals and chemicals, suggests potential challenges for revenue growth tied to base volume consumption derived from customer production rates.
  
• Regulatory uncertainties and delayed final investment decisions (FID) for large-scale projects due to new administrations and changing policies in regions like North America may impact the timing and realization of projected capital expenditures and long-term revenue streams.
  
• Geographic risks from emerging market exposure, as seen with variables like currency devaluation in Latin American regions, could affect revenue stability and profitability due to price volatility and economic instability.
  
• Increased focus on managing potential impacts from tariffs and macroeconomic factors may impose additional costs or affect demand in certain regions, which could lead to variability in sales and margins.

Valuation

• The analysts have a consensus price target of $496.05 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 $37.7 billion, earnings will come to $8.7 billion, and it would be trading on a PE ratio of 32.1x, assuming you use a discount rate of 7.8%.
• Given the current share price of $460.71, the analyst price target of $496.05 is 7.1% 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.