Forging Ahead, Positive Growth Trajectories Amidst Economic Adversity And Sectoral Shifts

Key Takeaways

• Linde aims to grow through investments in small applications, technology, and acquisitions, focusing on resilient markets like healthcare and food & beverage for stable growth.
  
• Expansion in electronics and investments in decarbonization projects signal potential for substantial revenue and earnings growth, underpinned by a healthy contracted backlog.
  
• Challenges in revenue growth, risks from declining manufacturing sectors, and vulnerabilities due to geopolitical issues suggest pressures on earnings and revenue stability.

Catalysts

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

• Linde's investment in small on-site applications, technology, and acquisitions aims to grow its network density and fuel future revenue growth, especially as it plans to offset losses in equipment hard goods amid economic downturns.
  
• The company's strategy to focus on resilience-driven markets like healthcare and food & beverage, where demand remains stable or growing, suggests potential for sustained revenue increases in these segments.
  
• Linde's expansion into electronics, particularly in APAC, driven by demand for AI chips and data centers, despite the current offset by lower volumes to fabs, indicates potential for substantial revenue growth if the predicted recovery in the second half of the year materializes.
  
• Investments in decarbonization projects and partnerships, such as the supply agreement with H2 Green Steel for green steel production and expanded relationships in China for increased supply reliability, hint at future earnings growth through higher on-site volumes in metals, mining, and the chemicals and energy sectors.
  
• The healthy contracted backlog of approximately $5 billion, alongside a projected continuation of mid-single digit growth in resilient end markets and the inclusion of encouraging secular growth trends in batteries, aerospace, and clean energy, supports expectations for sustained earnings growth despite current flat economic conditions.

Assumptions

• Analysts are assuming Linde's revenue will grow by 5.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 19.3% today to 21.5% in 3 years time.
• Analysts expect earnings to reach $8.3 billion (and earnings per share of $17.99) by about July 2027, up from $6.3 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $9.0 billion in earnings, and the most bearish expecting $7.3 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 32.5x on those 2027 earnings, down from 34.2x today. This future PE is greater than the current PE for the US Chemicals industry at 25.9x.
• Analysts expect the number of shares outstanding to decline by 1.81% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.79%, as per the Simply Wall St company report.

Risks

• Stagnant economic conditions and volume declines in most regions signal potential challenges in achieving revenue growth, which could impact future profits.
  
• Negative base volumes aligned with declining manufacturing environments, notably in EMEA, indicate risks to revenue from key industrial and manufacturing sectors.
  
• Dependence on contracted backlog for growth amidst uncertain near-term industrial production improvements suggests possible vulnerabilities in earnings sustainability.
  
• Geopolitical and energy challenges in regions like EMEA and the U.S. manufacturing sector downturn could lead to further pressures on both net margins and overall revenue.
  
• Fluctuations in demand for healthcare and electronics segments, impacted by portfolio rationalization and sectoral shifts, present potential risks to both earnings and revenue stability.

Valuation

• The analysts have a consensus price target of $472.63 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 2027, revenues will be $38.5 billion, earnings will come to $8.3 billion, and it would be trading on a PE ratio of 32.5x, assuming you use a discount rate of 7.8%.
  
• Given the current share price of $449.29, the analyst's price target of $472.63 is 4.9% 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.