L'Air Liquide (OTCPK:AIQUY) and Linde (NYSE:LIN) are two of the largest industrial gas companies in the world. L'Air Liquide is French, while Linde is headquartered in Ireland. They both benefit from operating in an attractive industry, which has very favorable dynamics for a number of reasons. First, industrial gases typically account for only a very small percentage of the customer's costs, but they are a critical input. As such, reliability is more important than price in most cases. Second, there are high switching costs for customers to change suppliers, and it is also common for them to sign long-term supply contracts. This combination of high value to price, and significant switching costs, contribute to the competitive moats of both companies, allowing them to have high profit margins and earn excellent returns on capital.
Another thing to like about these companies is that they are quite stable and less affected by the cyclicality of the economy compared to others. Historically both companies have delivered solid results, but Linde has managed to outperform the S&P 500 index (SPY) in the last ten years by a small margin, while L'Air Liquide has underperformed.
L'Air Liquide has a CAGR sales growth target of +5-6% and a return on capital employed of more than 10% starting in 2023. Linde has not been that specific with their financial performance objectives, but in its most recent earnings call management said they feel confident in delivering 10 plus percent EPS growth over the next several years.
One thing to note is that Linde's EPS has been more volatile, for example its earnings took a big hit during the worst of the Covid crisis, while L'Air Liquide's earnings remained more stable. That said, in the past ten years Linde has grown its earnings per share at a slightly faster pace, but much of it was thanks to the synergies resulting from its merger with Praxair.
Some of the growth differences can also be explained by their different geographic exposures. L'Air Liquide has a stronger market share in Europe, which is its primary market, while Linde is more diversified in terms of geography and has a strong presence in North America and Asia.
Both companies have been investing in hydrogen infrastructure for some time, but the Inflation Reduction Act has accelerated very significantly the growth potential for this part of the business. Linde is estimating that it could make more than $20 billion of potential investments in the coming years, with some of the larger ones related to blue and green hydrogen and blue ammonia. Meanwhile, L'Air Liquide aims to triple its hydrogen sales by 2035. Needless to say, hydrogen is going to become one of the most important growth areas for both companies.
After its merger with Praxair, Linde became the largest industrial gases company in the world by revenue, surpassing L'Air Liquide. It is difficult to compare their revenue growth as much of Linde's is the result of that merger, but it is clear that both companies are growing sales at a similar rate and that growth has accelerated recently.
While L'Air Liquide has significantly higher gross profit margins, they both have relatively similar operating margins. For industrial companies these close to 20% operating margins are excellent, and the result of the competitive moats both companies have.
Both companies carry a similar amount of long-term debt, but Linde is slightly less leveraged as it has a higher EBITDA.
Dividend Yield and Dividend Growth
L'Air Liquide currently has a slightly higher dividend yield at ~1.8% compared to Linde's ~1.4%. Both companies have an impressive track record of growing their dividends for several decades. Linde's dividend has been growing more quickly in recent years, but L'Air Liquide's +8.3% 30 year CAGR is quite respectable. Interestingly, L'Air Liquide has a program to reward long-term shareholders by increasing the dividend by 10% after two years, but if we understand correctly shares have to be held directly.
In the past ten years Linde has been consistently valued at higher valuation multiples compared to L'Air Liquide. We believe, however, that the difference is too significant at the moment, with Linde trading with an EV/Revenue multiple about two turns higher.
Similarly, Linde is trading with an EV/EBITDA about 5 turns higher compared to L'Air Liquide, and about 4 turns higher compared to its own ten year average.
L'Air Liquide is currently trading at only a slight premium to its ten year average price/earnings ratio, while Linde is trading at almost a 50% premium. The Non-GAAP forward p/e ratio for Linde is roughly 27x, while that of L'Air Liquide is ~23x. Seeking Alpha gives Linde an 'F' valuation grade, while it gives L'Air Liquide a 'D-' note.
Based on our estimates for future earnings we calculate a fair value for Linde of $295 per share, which implies a ~10% overvaluation. For L'Air Liquide we estimate a fair value of ~$33 for the ADRs, which implies a slight undervaluation of ~6%. We use a 9% discount rate in both cases.
At the moment we believe L'Air Liquide to be the better option for long-term investors, given the more attractive valuation and higher dividend yield. It also has shown more stability in its financial results. That said, Linde has been growing its dividend at a faster rate in recent years, has more exposure to faster growing geographies, and has slightly less leverage.
Both companies are exposed to regulatory risks that could increase their costs, and being international companies they also have currency risks. They both have significant debt, which could make them more vulnerable to economic downturns. Still, we consider both companies to be very resilient and more defensive than the average company.
L'Air Liquide and Linde are two leading industrial gas companies that greatly benefit from operating in a favorable industry, and both have strong competitive moats. Both companies are also investing in hydrogen infrastructure for future growth. They both have a strong track record of growing dividends for shareholders. Linde has outperformed L'Air Liquide in the past decade, but L'Air Liquide currently has a higher dividend yield and a more attractive valuation.
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This article was written by
Fin-tech startup leveraging machine learning technology to discover investing opportunities and to generate growth-optimal portfolios. Publisher of the WideAlpha AI-Selected Index, which has markedly outperformed its benchmark.
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling shares, you should do your own research and reach your own conclusion, or consult a financial advisor. Investing includes risks, including loss of principal.
L'Air Liquide has received a consensus rating of Hold. The company's average rating score is 2.25, and is based on 3 buy ratings, 4 hold ratings, and 1 sell rating.Is Linde a good stock to buy? ›
Linde has received a consensus rating of Buy. The company's average rating score is 2.76, and is based on 14 buy ratings, 2 hold ratings, and 1 sell rating.Who is the competitor of Linde? ›
Linde Group's top competitors include CarbonBridge, Proteum Energy, and Yingde Gases.Is Linde PLC overvalued? ›
Linde plc - Buy
Valuation metrics show that Linde plc may be overvalued. Its Value Score of D indicates it would be a bad pick for value investors. The financial health and growth prospects of LIN, demonstrate its potential to underperform the market. It currently has a Growth Score of B.
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Linde PLC (NYSE:LIN)
The 25 analysts offering 12-month price forecasts for Linde PLC have a median target of 375.00, with a high estimate of 418.00 and a low estimate of 299.39. The median estimate represents a +3.53% increase from the last price of 362.23.
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Linde, Air Liquide, Air Products, and Taiyo Nippon Sanso are the largest industrial gas companies worldwide. Together, these four conglomerates account for over 80 percent of the industrial gas sector. Linde, a global multinational headquartered in Ireland, is currently the leading company in the industry.Who is the Fortune 1 company? ›
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Description. Linde is a private company with an estimated 34,164 employees. In the US, the company has a notable market share in at least three industries: Oxygen & Hydrogen Gas Manufacturing, Organic Chemical Manufacturing, Heating & Air Conditioning Wholesaling and Organic Chemical Manufacturing.What is Linde known for? ›
Linde is a leading global industrial gases and engineering company with 2022 sales of $33 billion.Is Linde a green company? ›
Linde helps customers worldwide improve their environmental performance and reduce their carbon footprint. At the same time, we are committed to minimizing our own environmental resource intensity, including for energy, water and waste.Does Linde operate in Russia? ›
Linde is a major manufacturer of industrial, food, medical and special gases in Russia. Having gained a unique experience on the local market, we offer package solutions of gas supplies to companies in various production sectors.Does Linde own Praxair? ›
was an American worldwide industrial gases company. Founded in 1907, Praxair was the largest industrial gases company in North and South America, and the third-largest worldwide by revenue. In 2018 it merged with Linde AG to form Linde plc. The Praxair name was discontinued on September 1, 2020 in the US.
It can be obtained from natural CO2 springs, limestone kilns, fermentation processes and gas streams from chemical and petrochemical plants.Is Air Liquide part of Linde? ›
Air Liquide vs The Linde Group.
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