Industrial gas giant Linde's light guidance looks conservative; shares turn higher

Published Thu, Apr 28 20221:51 PM EDT

U.K.-based Linde , a leading industrial gas and engineering company, reported solid first-quarter results before the opening bell Thursday. Bottom line While adjusted per-share earnings and revenue best estimates, Linde's forward guidance came in a tad below expectations, which weighed on shares earlier in the session. But the stock turned positive, in the broader market upswing Thursday. We believe this was an overall great quarter. Regarding guidance, management factored in a wind down of Russian operations, which were small to begin with at roughly 1% of sales, and removed all earnings contributions from the country by the second half of the year. They also assumed no economic growth for the rest of the year. As a result, we believe the guide to be conservative. In addition to solid headline numbers for the quarter, cash flow came in better than expected, capital expenditures came in lower and the board of directors authorized a new share repurchase program that management has already put to work. Companywide Q1 results Revenue increased 13% from the year-ago quarter to $8.2 billion, outpacing the $8.15 billion consensus estimate. Adjusted earnings of $2.93 per share — up 18% year over year — exceeded the $2.77 estimate. Additionally, operating profit rose 13% to $1.91 billion, beating expectations of $1.85 billion and benefiting from a 1.3 percentage point expansion in adjusted operating margin, which came in at 23.2%. When discussing operating margin performance, we exclude the impact of "cost pass-through," which represents the contractual billing of energy cost changes to customers. While this pass-through does not impact actual profit dollars, it does affect reported margins due to the adjustments made to both sales and costs. 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 also serves both consumer and industrial end markets. The following is a look at Q1 year-over-year sales growth numbers for each category. Consumer-oriented (viewed as more resilient) Health care down 1% Food & beverage up 21% Electronics up 13% Industrial-oriented (viewed as more cyclicals) Manufacturing up 11% Chemicals & energy up 17% Metals & mining up 7% Other down 5% As operating cash flow, it was $2 billion for the quarter, edging out the $1.98 billion consensus. After backing out lower than expected capital expenditures of $649 million, free cash flow of $1.35 billion came in well ahead of the $1.18 billion consensus. CapEx came in below estimates of $799 million. As members know, we place high importance on cash flows in this tough market. We believe what works in this environment is companies that "make stuff and do things" at a profit and can return excess capital to shareholders. That's exactly what we're getting from Linde. The company repurchased $1.7 billion worth of shares in the quarter and boosted their annual dividend on Feb. 28 by 10% — the 29 th consecutive such increase. The board of directors authorized a new $10 billion share repurchase program, another $1.7 billion of which was already put to use the current second quarter-to-date. Linde exited the first-quarter with a $3.3 billion gas backlog and a $2.2 billion equipment backlog. That broke down geographically as 28% in the Americans, 4% Asia Pacific and 68% Europe, Middle East and Africa and by end market as 10% manufacturing, 3% metals, 30% electronics, 4% chemicals and 53% energy. Finally, after-tax return on capital — which measures the return on net assets employed in the business — came in at 18.9% for the quarter. It's one of the most important financial metrics in Linde's industry. That was a significant improvement from the 14.5% level realized in the year ago period and up from 10.4% three years ago. That demonstrates strong execution and sustained high performance across the business. Q1 segment results Gases Sales in the Americas of $3.24 billion, up 14% year over year, edged out expectations of $3.2 billion, driven by all end markets aside from health care with the greatest strongest growth being seen in manufacturing, chemicals and energy. Operating profit of $904 million came in better than the $868 million consensus, thanks to a 100 basis point expansion in adjusted operating margin. Asia Pacific sales of $1.6 billion, up 12% year over year, were better than expectations of $1.55 billion, driven by project startups in electronics, chemicals, and energy end markets. Operating profit of $399 million was better than the $372 million the Street was looking for, benefiting from a 140 basis point expansion in adjusted operating margin. Sales in Europe, Middle East & Africa of $2.15 billion, up 19% year over year, outpaced expectations of $2.04 billion, with growth seen in all end markets except health care and led by the food and beverage, chemicals and energy. Operating profit of $503 million, up 12% year over year, was better than the $476 million consensus, benefiting from a 170 basis point adjusted operating margin expansion. Engineering (not geography specific) Sales of $728 million, up 8% year over year, came up short versus the $863 million the Street was anticipating, while operating profit of $143 million, up 31% year over year, came up short versus the $150 million consensus. Other (not geography specific) Sales of $492 million came in short of expectations for $529 million, while an operating loss of $44 million was greater than the $8 million loss the Street was expecting. Guidance Looking ahead to the second quarter, management forecasted adjusted earnings of $2.90 to $3 per share, a penny short at the midpoint versus the $2.96 per share consensus. Notably, this guidance "assumes no economic growth," as we mentioned above. As for the full year 2022, management forecasts earnings of $11.65 to $11.90 per share, also a bit short versus the $11.81 consensus, at the midpoint. This too assumes no economic growth. Notably, this guidance, according to management on the call, "excludes contribution from Russian earnings by the second half of 2022 as the company continues to scale back Russian operations and wind down engineering projects affected by sanctions." On the expense side, guidance for $3 billion to $3.4 billion in capital expenditures came in below expectations of $3.53 billion, at the midpoint. (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.

The Linde AG logo on a liquid hydrogen tanker truck taking a fuel delivery at the Linde hydrogen plant in Leuna, Germany, on Tuesday, July 14, 2020.

Rolf Schulten | Bloomberg | Getty Images