Linde (LIN), a U.K.-based global industrial gas and engineering company, reported mixed headline results but an overall strong fourth quarter before the opening bell Tuesday. The stock popped nearly 4% as Wall Street showed appreciation for what we’ve been saying all along about the durability of the company’s businesses even in tough times. Linde makes the right kind of products that drive the economy. Revenue fell 4.8% from the year-ago period to $7.9 billion, missing the $8.4 billion consensus estimate, according to Refinitiv. Adjusted earnings of $3.16 per share — up 14% year over year — exceeded the $2.91 estimate and was well above guidance of $2.80 to $2.90 per share. Additionally, adjusted operating profit rose 8.7% to $2 billion, beating expectations of $1.88 billion. Bottom line Once again, management over-delivered to cap off fiscal year 2022, delivering record operating margin, earnings, and return on capital for both the fourth quarter and on a full-year basis. Excluding foreign exchange (forex) fluctuations, this marks the ninth quarter in a row of 20% or better annual earnings growth —especially remarkable during multi-decade high inflation. While the top line missed expectations, Linde’s ability to pass costs through to customers, along with management’s strong execution and continual increases in operating efficiency resulted in a solid bottom line, forward earnings guidance above estimates, and ongoing shareholder returns via dividends and buybacks. LIN 1Y mountain Linde (LIN) 1-year performance In addition to a strong backlog that serves to support management’s expectation for continued earnings growth in fiscal year 2023, Linde’s expertise in helping customers reduce carbon emissions gives us great confidence for growth beyond the current year. To this point, over $2 billion of the company’s $9.2 billion backlog exiting 2022 is focused on decarbonization projects. This of course makes Linde a key beneficiary of the U.S. government’s Inflation Reduction Act, which heavily emphasizes cleaner energy. Linde repurchased about $690 million worth of shares in the fourth quarter. This brings full-year shareholder returns via dividends and buybacks to $7.5 billion, or roughly 5% of the company’s average market cap. Given the strong guidance, pricing power, record profitability and return on capital, we’re upgrading the stock to a 1 rating and raising our price target up to $370 per share from $360. Linde’s stock is about 5.7% from its intraday all-time high of $352.18 on Jan. 5, 2022. Earlier this month, Linde came under pressure, due, in part, to its strong advance in 2022 and the company’s decision to delist from the Frankfurt Stock Exchange in February. The stock will remain listed on the New York Stock Exchange. Q4 results In addition to providing gas processing solutions, Linde’s industrial gases are used in numerous settings, including hospitals, electronics manufacturing and clean fuels. The company serves both consumer and industrial end markets. Although about two-thirds of Linde’s sales are in more cyclical end markets, Linde’s business model is very defensive. The table above is a look at Q4 sales growth numbers for each category. Adjusted operating margin of 25.3% in the fourth quarter rose 315 basis points (bps) as seen toward the bottom of the above table. Excluding cost pass-through, it rose 350bps versus the year-ago period. The term cost pass-through represents the contractual billing of higher energy cost charges to customers —these costs are “passed-through” to the customer. While this pass-through does not impact actual profit dollars, it does dilute reported margins due to the adjustments made to both sales and costs. As a result, analyzing ex-cost pass-through margin performance provides us a better view of management’s ability to drive increased efficiency. Under the Geographic Results section, industrial gas sales in the Americas of $3.4 billion, while below estimates, increased from a year ago — largely as a result of higher prices and an improved sales mix as annual sales growth was seen in all end markets aside from Healthcare. Metals & Mining and Manufacturing was the strongest end market in the region. In the Asia/Pacific region, reported sales declined versus the year-ago period as the benefits of increased volume, higher prices and a positive sales mix were wiped out by a 9% currency headwind. In Europe, the Middle East & Africa (EMEA), higher selling prices and an improved sales mix were good to see, but volume was down and forex was an 11% headwind. Engineering sales, which are not reported by geography, declined annually to $562 million — largely due to the suspension of projects in Russia due to Moscow’s invasion of Ukraine. Management expects “a few more quarters of engineering volatility,” with the start of the war in Ukraine lapping and more projects get suspended in the region. Though all Russian activity was ended in July 2022, required settlement activity has lasted beyond that. Global Other sales, again not geography specific, declined to $323 million — largely due to the divestiture of Gist Limited, Linde’s temperature-controlled logistics provider primarily in the United Kingdom and Ireland. This, however, was partially offset by improved aerospace and electronics sales in the coatings business. Guidance Better-than-expected sequential guidance of $3.05 per share to $3.15 amounts to a 4% to 8% annual increase (or 9% to 13% ex-forex). The company said it “assumes that recovering U.S. pipeline volumes and an acquisition are mostly offset by China seasonality and lower engineering profit.” Full-year guidance of $13.15 per share to $13.55 was also higher than estimates, representing 7% to 10% annual growth (or 9% to 12% ex-FX assumes “no material change in economic conditions at the midpoint,” and incorporates a 4% foreign exchange headwind in the first half of the year that is expected to abate in the back half. That said, on the call, management noted that recent foreign exchange trends have been trending better and as a result, could prove a source of upside. Linde’s ability to grow earnings year over year despite FX and broader economic uncertainty speaks to the strength and resiliency of its business models. Should the economy indeed grow throughout 2023, management expects upside to the midpoint, if not they will take action to mitigate the impact similar to what we saw in 2020 and 2022. (Jim Cramer’s Charitable Trust is long LIN. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
Linde Group logo is seen at a company building in Munich-Pullach, Germany.
Michaela Rehle | Reuters
Linde (LIN), a U.K.-based global industrial gas and engineering company, reported mixed headline results but an overall strong fourth quarter before the opening bell Tuesday. The stock popped nearly 4% as Wall Street showed appreciation for what we’ve been saying all along about the durability of the company’s businesses even in tough times. Linde makes the right kind of products that drive the economy.