Linde's guidance leaves investors wanting more. We're saying thanks to the sellers

Published Thu, May 2 20241:29 PM EDT

Kevin Stankiewicz @in/kevin-stankiewicz-b5593466 @kevin_stank

Shares of Linde fell on Thursday after the industrial gas giant reported mixed first-quarter results and its guidance left some investors wanting more. The sellers graciously gave us the opportunity to add to our position in Linde for the first time in more than two years. Revenue in the three months ended March 31 fell 1.1% on an annual basis to $8.1 billion. That we short of the $8.37 billion expected by analysts, according to LSEG. Adjusted earnings per share checked in at $3.75, ahead of the $3.68 estimate from LSEG. Adjusted operating profit of $2.34 billion topped the FactSet-compiled consensus of $2.29 billion. Linde Why we own it: The industrial gas supplier and engineering firm has a stellar track record of consistency, delivering double-digit earnings growth for five consecutive years. Linde's exposure to a wide range of industries and geographies — paired with excellent executive leadership and disciplined capital management— has been a recipe for steady success that looks poised to continue. Competitors: Air Liquid and Air Products Most recent buy : May 2, 2024 Initiated : Feb. 18, 2021 Bottom line We're seizing on the weakness in Linde's stock Thursday. Nothing in the report, including the subdued guidance, shakes our belief that this is among the high-quality companies around, with all the tools needed to reliably grow earnings in the quarters and years ahead. Linde's topline performance is heavily dependent on global economic conditions because its customers operate in a range of industries including aerospace, electronics, and steel-making to name a few. The demand for its gases, in other words, is tied to what its customers are doing. This relationship was on display in Thursday's report, with volumes in the quarter down and revenues falling 1% on an annual basis as the industrial economy stagnates. The reason to stick with Linde is because it has consistently demonstrated an ability to control what it can control — pushing through price increases when necessary and driving productivity gains to boost profits. Management made it clear on Thursday's conference call that they will keep pulling those levers. That's how Linde has become one of just 12 companies in the S & P 500 to beat the index on a total return basis in each of the past five years. LIN YTD mountain Linde's year-to-date stock performance. We understand that investors have grown accustomed to Linde beating quarterly numbers and raising guidance and that the yearslong streak coming to an end Thursday certainly was factoring into the stock's roughly 5.5% drop. At the same time, Linde did not cut its full-year outlook — the midpoint of the range was maintained — and there are reasons to believe there may be upside to the numbers as the year progresses. When we trimmed our position in late March, we did not necessarily know we'd be getting a chance to buy back all 25 shares roughly 10% below where we sold. But that's exactly why it's important to be disciplined and lock in gains along the way. It enables us to view unwarranted pullbacks as an opportunity, rather than a moment of regret. We're upgrading Linde to our buy-equivalent 1 rating and keeping our price target of $500 per share. Quarterly results In the face of the challenged economic picture, Linde's ability to yet again deliver gains on profitability metrics shines even brighter. Adjusted operating profit of $2.34 billion and operating margin of 28.9% topped Wall Street estimates. Meanwhile, earnings per share grew nearly 10% year over year — right around the digit-digit clip we've come to know and love from Linde. Ideally, the industrial economy would be in better shape than it is. But the benefit of investing with a long-term view is we can be patient and know Linde will eventually reap the rewards. "When industrial production levels rebound, as they always do, Linde will be very well-positioned to leverage this growth," CEO Sanjiv Lamba said on the conference call Thursday. Operating cash flow seemed to be a sizable miss, at $1.95 billion versus the FactSet estimate of $2.46 billion, but management downplayed the significance. For starters, the first quarter is usually the lowest of the year due to working capital and incentive payments, CFO Matthew White said. This year, it also was impacted by the final day of the quarter being Good Friday, which meant banks were closed and Linde didn't receive some cash from customers that day. Cash collections recovered in April, so Linde should be back on track by the end of the second quarter, White added. Among the most encouraging parts of Linde's conference call Thursday was the discussion around its electronics business, which represents about 10% of its portfolio. Lamba said he is optimistic that volumes will pick up in the second half of 2024, driven in part by soaring demand for artificial intelligence chips and new data centers. Those are familiar tailwinds, poised to lift Club holdings like Nvidia , the leading AI chipmaker, and Eaton , whose electrical equipment helps power data centers. It's nice to see Linde express confidence that it expects to benefit in the coming months, too. Curiously, though, Lamba said Linde has not baked this rebound in electronics volumes into its full-year outlook. We're not sure of the rationale for excluding it but that explains why we're not fretting about Linde's lack of guidance raise. Linde's multibillion pipeline of clean-energy projects remains solid, Lamba added, though he did acknowledge that momentum around them, in general, is "moderating a little bit." The company expects investment decisions on those projects will be made in the coming years, translating to revenue for Linde. However, Lamba said some parts of the process are taking a bit longer. Guidance For the second quarter, Linde projects adjusted EPS between $3.70 and $3.80, which implies 5% to 7% year-over-year growth, excluding currency impacts. The midpoint of $3.75 is below the consensus estimate of $3.88, according to FactSet. Linde said it now expects to earn an adjusted $15.30 to $15.60 per share in 2024, compared with initial guidance of $15.25 to $15.65. The revised outlook implies between 9% to 11% annual growth, excluding currency impacts, versus the initial 8% to 11% projection. The midpoint of the EPS range is unchanged. As always with Linde, the midpoint of the guidance assumes no economic improvement. That means if the global economy improves, there could be upside to Linde's profits. If there's a material slowdown as the year progresses, Linde management has pledged to take action to keep the range intact. On the call, CFO Matthew White said Linde has seen some erosion in the economy since it first offered the guidance in February and has already taken some action to protect the midpoint of its range. "We feel in this environment it's better to be cautious than to be overly aggressive," White said. Linde now sees capital expenditures totaling between $4 billion and $4.5 billion this year, down from the original projection of $4.5 billion to $5 billion. (Jim Cramer's Charitable Trust is long LIN, ETN, NVDA. 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 logo is seen at a company building in Munich-Pullach, Germany.

Michaela Rehle | Reuters

Shares of Linde fell on Thursday after the industrial gas giant reported mixed first-quarter results and its guidance left some investors wanting more.