Linde plc

Moat: 4/5

Understandability: 3/5

Balance Sheet Health: 4/5

Linde plc is a global industrial gases and engineering company, providing gases for industrial, medical, and other commercial use. Their offering also includes a wide range of production processes.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: Linde operates across four main business segments. Gases, which is the core of its operations and contributes the majority of the revenue: It produces and distributes a variety of industrial gases such as atmospheric gases (nitrogen, oxygen, argon, and rare gases) and process gases (hydrogen, carbon dioxide, and specialty gases). These gases are used by many industries ranging from chemical and energy to manufacturing and healthcare.

  • Merchant: This business sells gases directly to smaller customers through its local branches. This approach includes offering gases in packaged forms.
  • On-Site: This business is used to meet the needs of high-volume customers. The products in this segment are produced on-site at the customer’s facilities with a long-term contract.
  • Packaged Gases: This business provides gases to customers in packaged forms such as cylinders, containers, and liquid gas packages.
  • Engineering: Linde designs, engineers, and constructs chemical plants, primarily in the industrial gases sector.

Linde’s financial performance is not simply based on their operations but also linked with the global industrial economy, and the economic conditions in a lot of regions around the globe.

Industry Trends and Competitive Landscape:

  • The industrial gas industry is characterized by high barriers to entry, including significant infrastructure investment and specialized technology and distribution networks. Because of the logistical difficulties of transporting industrial gasses, companies focus on a particular region. This can lead to an oligopolistic market structure in several regions.
  • The industry is highly concentrated, with the top players like Linde, Air Liquide, and Air Products enjoying significant global market shares. This concentration indicates the presence of barriers to entry and a degree of pricing power.
  • A key trend is the increasing demand for hydrogen, driven by the growth in clean energy technologies. Hydrogen is the main focus for LIN as part of their “hydrogen strategy”.
  • There’s a growing emphasis on sustainability and decarbonization, leading to a transition towards more eco-friendly gasses and processes, which are areas where LIN also invests a lot of capital.

What Makes LIN Different?:

  • Global Scale: Linde is one of the largest players in the industry and operates in many countries around the world.
  • Technology and Innovation: It leverages its expertise in plant design, process technologies, and applications know-how. It provides many innovative and complex solutions to its customers, from designing new processes to the handling of various gasses.
  • Diversified Customer Base: LIN caters to a variety of industries, including manufacturing, chemical, food and beverage, energy, and healthcare. These types of industries ensure that the company is stable even with fluctuating economic situations.
  • Vertical Integration: LIN is vertically integrated, from production of gasses to distribution, which gives them greater control over its supply chain.
  • Sustainability Focus: It is focused on providing clean energy solutions such as hydrogen production and utilization.
  • Strong Customer Relationships: The company often enters long-term contracts with high-volume customers to establish their supply chain. They have a lot of specialized knowledge that the customer would have to acquire if they were not dealing with Linde, as well as the convenience of delivery and other related services that LIN provides.

Financials Overview: Linde’s financial health is generally strong. Here’s a summary of key elements (based on their latest financial reports for Q3, 2023):

  • Revenues: In Q3 2023, sales totaled $8,250 million, with a 6.1% year-over-year decline. However, excluding currency effects and pass-through, revenue was actually up 7.3%. Sales declined in the Americas and APAC, while EMEA saw increases. For the nine months, sales were up 3%
  • Profitability:
    • The operating profit margin is at 24.9% in the last 9 months of 2023 and has increased slightly YoY.
    • EBITDA margin has gone up 1% year over year to reach 31.4%.
  • Cash Flow:

  • Net cash generated by operating activities in the first 9 months of 2023 was $5,100 million, up 16% year over year. * Free cash flow for first 9 months of 2023 was $3.2 billion.

  • Debt: The company has a debt to capital ratio of 25%, with a long-term debt of $14.5 Billion.
  • Capital Allocation: The company is increasing its share buybacks significantly and has targeted approximately $10 Billion of share repurchases for 2022-2024. The dividend payments have also been increasing YoY.

Based on their recent earnings calls, LIN seems to be focusing on increasing productivity and efficiency, as well as their focus on growing the hydrogen market and building infrastructure around it.

Moat Rating: 4 / 5 Linde has a strong economic moat which should result in significant future profitability. Their moat is primarily driven by the following:

  1. Scale and Distribution: LIN’s global reach and extensive distribution network are extremely expensive and hard for competitors to match. These include logistics, local infrastructure, and supply chains.
  2. Barriers to Entry: The industrial gas industry has high barriers to entry, including the technological expertise, the high cost of building facilities, and regulatory and environmental permits.
  3. Intangible Assets: LIN possesses strong reputations, built over time, with high-quality industrial production and has a strong brand in its sector. They provide many industrial customers with very specific or customized products and processes for their business.
  4. Switching Costs: For a lot of large customers, changing supplier would require some changes to their infrastructure. They are so tightly integrated to these customers’ businesses that the cost of switching to a new supplier would be too high.

Though these are good competitive advantages, there are some vulnerabilities. Their technological capabilities are not as difficult for competitors to emulate and newer entrants might compete with the company by offering lower prices. This makes the moat a strong but narrow one.

Risks to the Moat and Resilience:

  • Technological Disruption: The pace of technological change is rapid, and a new method of gas production might make some of the processes at LIN obsolete. The main risk, however, is the disruption of their production processes. As of now, however, their investments in new processes, such as hydrogen, might help them retain their competitiveness.
  • Industry Cyclicality: Many of LIN’s customers operate in industries that are cyclical in nature (such as manufacturing and oil) making them susceptible to economic downturns and might affect future performance. It is worth noting that LIN has tried to mitigate this risk by having contracts with diverse industries, giving them some more predictability.
  • Regulatory Changes: Governments set a lot of regulations for large producers in any sector, which could change and negatively affect the company’s profits and business. The company is dependent on governments’ willingness to support carbon recapture technologies.
  • Customer Concentration: Even though the customer base is very diversified, a few customers have long-term supply contracts with LIN. A large dip in the business of one of those larger customers could severely hurt LIN’s revenue.
  • Commodity Prices: Natural gas and electricity prices fluctuate a lot which can directly impact its profitability in the production process.

While LIN has a strong economic moat, a major risk would be a large shift in the industry structure which would render the current processes less useful, which is an event the investor should have on their mind.

Understandability: 3 / 5 The core business of LIN, producing and selling industrial gases, is relatively easy to grasp. Also, the main driving factors behind its financials and the general company are not very hard to understand. However, several parts of the business, especially parts related to the complex engineering operations, different regions in which they operate, and the different rules and regulations in these countries, require special effort in understanding. Also, the multiple segments also make it a little difficult for understanding all parts of the business.

Balance Sheet Health: 4 / 5 LIN has a fairly solid balance sheet with a good debt to capital ratio of around 25%. They have also recently begun a significant share buyback program, which, though good for shareholders, adds another component to the financial situation of the company. The cash and equivalents are quite low, relative to the debt they have, so they are slightly dependent on further financial activities. For the most part, the company’s balance sheet is healthy and in a good enough position to allow them to invest in new technologies and infrastructure, and respond to future downturns in the market.

The company appears to be in a fairly good position for the future, with its focus on hydrogen technology, its wide moat, and its stable balance sheet. The management, however, needs to focus on making the business model less vulnerable to disruptive forces and also ensure that the company does not become too leveraged over time.