Linde's ability to manage inflation was on display in the industrial gas giant's strong quarter

Published Thu, Oct 27 20222:14 PM EDT

Linde (LIN), a U.K.-based global industrial gas and engineering company, reported strong third-quarter results before the opening bell Thursday. We're like how the firm continues to grow its profits despite inflation. Revenue increased 15% from the year-ago period to $8.8 billion, outpacing the $8.3 billion consensus estimate, according to Refinitiv. Adjusted earnings of $3.10 per share — up 14% year over year — exceeded the $2.93 estimate and was well above guidance of $2.85 to $2.95. Additionally, operating profit rose 11% to $2.01 billion, beating expectations of $1.9 billion. Excluding cost pass throughs, which we will define later, company wide margins expanded 90 basis points year over year but were down 20 basis points sequentially. Linde's after-tax return on capital (ROC) was a record 21.8%, up 180 basis points from the second quarter and 510 basis points from last year. Bottom line Another under-promise, over-deliver quarter from Linde as the company continues to demonstrate strong pricing power (up 8% year over year) and great inflation management that more than offsets unfavorable impacts from the strong dollar and elevated energy pricing in Europe. We view Linde as a high quality, defensive company that can grow its earnings no matter the twists and turns the economy takes, with the business generating its highest after-tax ROC ever. Longer term, management believes (1) clean energy opportunities — especially after the passage of the Inflation Reduction Act — as a secular growth kicker, (2) continued operating discipline, and (3) a "relentless" focus on pricing and productivity gives them confidence in its ability to keep delivering +10% EPS growth over the next few years. For those reasons, we continue to stick by the name and are looking to upgrade our rating from the current 2 to a 1 on a pullback. Companywide Q3 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 also serves both consumer and industrial end markets. The following is a look at third-quarter sequential sales growth numbers for each category. Consumer-oriented (viewed as more resilient; about a third of total company sales) Health care up 3% Food & Beverage up 5% Electronics up 5% Industrial-oriented (viewed as more cyclical; accounts for the rest of sales) Manufacturing up 4% Chemicals & Energy flat Metals & Mining up 8% Other up 6% Although about one third of company sales are in resilient end-markets, Linde has a very defensive business model. A significant portion of the company's sales have fixed payment structures that don't change based on customer volumes. Even when volumes are down, which certainly could happen next year if the global economy slows as many predict, Linde believes it can preserve much of its top-line and p