Linde shares fell on Thursday after the industrial gas giant reported mixed first-quarter results and its guidance left some investors wanting more. Sellers have graciously given us the opportunity to strengthen our position in Linde for the first time in over two years. Revenue in the quarter ended March 31 fell 1.1% on an annual basis to $8.1 billion. We are below the $8.37 billion expected by analysts, according to LSEG. Adjusted earnings per share came in at $3.75, ahead of LSEG’s estimate of $3.68. Adjusted operating income of $2.34 billion beat the FactSet consensus of $2.29 billion. Linde Why We Own It: The industrial gas supplier and engineering company has a remarkably consistent history, delivering double-digit profit growth for five consecutive years. Linde’s exposure to a wide range of industries and geographies, coupled with excellent executive leadership and disciplined capital management, has been a recipe for consistent success that looks set to continue. Competitors: Air Liquid and Air Products Most recent purchase: May 2, 2024 Initiated: February 18, 2021 Conclusion We are taking advantage of the weakness in Linde stock on Thursday. Nothing in the report, including the moderate guidance, shakes our belief that this is a high-quality business with all the tools necessary to reliably grow earnings over quarters and years future. Linde’s performance is highly dependent on global economic conditions, as its customers operate across many industries, including aerospace, electronics and steel, to name a few. In other words, the demand for its gases is linked to what its customers do. That relationship was highlighted in Thursday’s report, with volumes falling in the quarter and revenue down 1% on a year-over-year basis as the industrial economy stagnates. The reason we remain loyal to Linde is that it has consistently demonstrated its ability to control what it can control – raising prices when necessary and generating productivity gains to increase profits. Management made clear during Thursday’s conference call that it will continue to pull these levers. This is how Linde became one of 12 S&P 500 companies to beat the index in total return in each of the last five years. LIN YTD mountain Linde’s stock market performance since the beginning of the year. We understand that investors have become accustomed to Linde beating quarterly numbers and raising guidance and that the year-long streak that ended Thursday certainly factored in the stock’s roughly 5.5% decline. . At the same time, Linde has not lowered its outlook for the full year – the midpoint of the range has been maintained – and there are reasons to believe that the figures could be at the increase as the year progresses. When we reduced our position in late March, we didn’t necessarily know that we would be able to buy back all 25 stocks approximately 10% below their sell level. But that’s exactly why it’s important to be disciplined and secure wins along the way. This allows us to view unjustified retreats as an opportunity rather than a moment of regret. We upgrade Linde to our equivalent Buy rating of 1 and maintain our price target of $500 per share. Quarterly results Faced with a difficult economic environment, Linde’s ability to once again generate profitability gains shines even brighter. Adjusted operating income of $2.34 billion and an operating margin of 28.9% beat Wall Street estimates. Meanwhile, earnings per share grew almost 10% year over year, pretty much the single-digit numbers we know and love at Linde. Ideally, the industrial economy would be in better shape than it is now. But the benefit of investing in the long term is that we can be patient and know that Linde will eventually reap the rewards. “When industrial production levels rebound, as they always do, Linde will be very well positioned to take advantage of that growth,” CEO Sanjiv Lamba said on Thursday’s conference call. Operating cash flow appears to be a significant miss, at $1.95 billion compared to the FactSet estimate of $2.46 billion, but management has downplayed the significance. For starters, the first quarter is typically the lowest of the year due to working capital and incentive payments, said CFO Matthew White. This year this was also impacted by the last day of the quarter, Good Friday, meaning the banks were closed and Linde did not receive money from its customers on that day. Collections recovered in April, so Linde should be back on track by the end of the second quarter, White added. One of the most encouraging aspects of Linde’s conference call Thursday was the discussion around its electronics business, which makes up about 10% of its portfolio. Lamba said he was optimistic that volumes would recover in the second half of 2024, driven in part by growing demand for artificial intelligence chips and new data centers. These are familiar tailwinds, poised to lift Club holdings like Nvidia, the leading AI chipmaker, and Eaton, whose electrical equipment helps power data centers. It is nice to see Linde expressing confidence that it also hopes to benefit from this in the coming months. Oddly, however, Lamba said Linde had not factored this rebound in electronics volumes into its full-year outlook. We’re not sure of the reasons for this exclusion, but it explains why we’re not concerned about Linde’s lack of direction on the increase. Linde’s multi-billion pipeline of clean energy projects remains strong, Lamba added, while acknowledging that momentum around these projects, in general, is “moderating a little bit.” The company expects investment decisions on these projects to be made in the coming years, resulting in revenues for Linde. However, Lamba said some parts of the process take a little longer. Guidance For the second quarter, Linde forecasts adjusted EPS between $3.70 and $3.80, implying growth of 5% to 7% year-over-year, excluding currency effects. The midpoint of $3.75 is below the consensus estimate of $3.88, according to FactSet. Linde said it now expects adjusted earnings of $15.30 to $15.60 per share in 2024, compared to an initial forecast of $15.25 to $15.65. The revised outlook implies annual growth of between 9 and 11 percent, excluding currency effects, compared to an initial forecast of 8 to 11 percent. The midpoint of the EPS range is unchanged. As always at Linde, the midpoint of the forecast assumes no economic improvement. This means that if the global economy improves, Linde’s profits could increase. In the event of a significant slowdown during the year, Linde management has committed to taking measures to keep the range intact. On the call, Chief Financial Officer Matthew White said Linde has seen some erosion in the economy since it first presented its forecast in February and has already taken steps to protect the midpoint of its range. “We think in this environment it’s better to be cautious than to be too aggressive,” White said. Linde now expects capital spending totaling between $4 billion and $4.5 billion this year, down from the initial projection of $4.5 billion to $5 billion. (Jim Cramer’s charitable fund is long LIN, ETN, NVDA. See here for a complete list of stocks.) As a subscriber to CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a transaction. Jim waits 45 minutes after a trade alert is sent before buying or selling a stock in his charity’s portfolio. If Jim talked about a stock on CNBC TV, he waits 72 hours after the trade alert is issued before executing the trade. THE ABOVE INVESTMENT CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, AS WELL AS OUR DISCLAIMER. NO OBLIGATION OR FIDUCIARY OBLIGATION EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTMENT CLUB. NO SPECIFIC RESULTS OR PROFITS ARE GUARANTEED.
The Linde logo is seen at a company building in Munich-Pullach, Germany.
Michaela Rehle | Reuters
Actions of Linde fell Thursday after the industrial gas giant reported mixed first-quarter results and its guidance left some investors wanting more.
cnbc Business