Linde Stock: Great Company But A Rich Valuation (NYSE:LIN)

Investment Summary

Linde plc (NYSE:LIN) is a global industrial gas and engineering company that offers a wide range of products and services to various industries. The company provides atmospheric and process gases, along with the necessary equipment and technologies. Its portfolio is quite diverse and includes solutions for healthcare, chemicals, energy, food and beverage, and manufacturing industries.

This wide exposure has netted the company a very impressive operating profit increase of 16% as shown in the last report. With steady growth expectations for many years ahead the company seems to offer a great addition to a portfolio, with a sound balance sheet and also offering a dividend. But what keeps me from rating it a buy is simply the valuation. In my mind, it’s too high right now at close to 27x forward earnings. Until there is a compression, I will have a hold rating for Linde.

Market Momentum

Seeing as Linde offers a variety of gases to customers they are essentially exposed to the broader industrial gas market. In a report by Grand View Research they estimate this market to grow 6.2% CAGR between 2023 – 2030 which seems very plausible given the outlook that Linde also provided in the last earnings report.

One of the major tailwinds and reasons for this growth is India becoming an ever-increasing powerhouse on the global market. They are expected to surpass China in population and experience a boom in their economy as more companies move their manufacturing there. This increase in manufacturing will bring more foreign capital into circulation for India which will help them grow their domestic companies also, fueling the need for products that Linde offers for example. This I think was also highlighted in the report presentation company noted they have been able to keep up strong pricing and YoY sales growth in all end markets there.

The management expects to increase the EPS by 9 – 13% from 2022 results and it was further increased given the solid Q1 the company had to start in 2023. But despite this raise, it does little to lower the forward multiple as it still sits around 27 p/e. What I think further fuels the momentum of the company is the stability seen in it by investors. The company raised the dividend and was still able to invest $1.6 billion into the business without risking exposing itself to any financial risk. I think this is what gives the company its multiple right now.

Risks

Some of the risks that I see with Linde is that they will get pushed out of some markets as it seems we are experiencing a deglobalization where governments are putting domestic companies before foreign ones. I think, however, the risk of this happening in the APAC region is quite limited as it’s still growing and in need of capital circulation to build a long-term growth trajectory.

As a global company that needs to ship its products, it is also faced with difficulties like margin retention as they can be volatile sometimes. Thankfully shipping rates have gone down and it seems Linde has been rather resilient despite the challenging economic environment. To give some more comfort the company has made it clear what its priorities are, the CEO Sanjiv Lamba said the following “Looking ahead, the geopolitical and macro environment continues to remain uncertain. Regardless, we will continue to create shareholder value in any economic scenario.” I think this should make most investors feel confident in that they will have a safe haven to store capital should there be continued uncertainty.

Financials

Looking at the balance sheet of Linde I think they are in a phenomenal state right now. The cash position might have seen a quarterly decrease but I think this does little to undermine any stability otherwise seen throughout. The cash position decreased nearly $500 million but still sits at a strong $4.9 billion which can have a significant impact on the long-term debt of $11.7 billion. What is slightly worrisome however is the current liabilities being higher than the current assets, primarily because of short-term debt of $5 billion and other current liabilities of $4.7 billion. I do think however it shouldn’t be an issue when they are generating nearly $5 billion in levered free cash flows and increasing margins also.

Looking at the total assets compared to total liabilities Linde has around 2.1x as much in assets, which is a great position to be in. Some might say the dividend and share repurchases might be under pressure but I think the company is despite the high current liabilities in a flexible financial state. The company managed to achieve a record 26.9% in operating margins and the trajectory forward seems to be upwards.

All in all, I think Linde has built up a fantastic balance sheet but I do admit the next few quarterly reports will be important to watch carefully to see the development of the debt and the payments of it also.

Valuation & Wrap Up

As mentioned in the beginning, the reason that keeps me from rating Linde a buy is simply the valuation right now. It sits around 27x forward earnings which is far above the sector’s average of 13. It worries me that making an investment now might open up the possibility of seeing a large valuation compression eventually. The share price has seen a run in the last few months and a pullback might very well hit.

Looking around in the gas market for other companies I don’t think the same quality as in Linde can quite be found. I remain confident that they have a strong business outlook with revenues continuing to increase and value being provided to shareholders.

What might bring some comfort to investors holding shares is the stable dividend the company has and the commitment to raising it also. Until I see a valuation more in line with the sector I don’t think it’s wise to invest as it opens up too much risk to a portfolio in my opinion.