Linde falls after its guidance fails to wow the market. We've seen this movie before

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Industrial gas supplier Linde reported a solid third quarter on Thursday, proving once again its ability to grow revenues and earnings in a sluggish macro and industrial environment. Revenue in the third quarter increased 2.5% to $8.36 billion, slightly beating estimates of $8.35 expected by analysts, according to estimates compiled by LSEG. Adjusted earnings per share (EPS) rose 8.5% year over year to $3.94, topping expectations by 5 cents, LSEG data showed. Adjusted operating profit in three months ended Sept. 30 was $2.48 billion, up 7.5% on an annual basis and ahead of the $2.43 billion estimate, according to FactSet. LIN YTD mountain Linde’s year-to-date stock performance. Bottom line We’re maintaining our hold-equivalent 2 rating and price target of $500 a share. Nothing we heard Thursday changes our view that Linde is a defensive, high-quality industrial with a consistent model of 10% earnings growth, give or take. To be sure, it wasn’t the typical beat-and-raise quarter that Linde has become known for over the years. However, it profits growing faster than sales is show how adept the company is at navigating tough economic conditions. Once economic activity picks up – perhaps from lower interest rates around the globe – and volumes grow again, we expect Linde will be back to its usual beat-and-raise cadence. Shares of Linde fell about 3% in tough day for the broader market. We attribute the decline to a slightly softer-than-expected fourth-quarter outlook, which incorporated economic contraction in the three-month period. Although the guide missed the bar, it is a prudent outlook since industrial activity has been weak, geopolitical tensions have increased, and there’s still plenty of uncertainty about what will happen after the U.S. election. Any stabilization or improvement in the economy could mean an upside surprise. Linde Why we own it: The industrial gas supplier and engineering firm has a stellar track record of consistent earnings growth. Its exposure to a wide range of industries, such as health care and electronics, and geographies — paired with excellent executive leadership and disciplined capital management — has been a recipe for steady success that should continue. Competitors: Air Liquid and Air Products Most recent buy : May 2, 2024 Initiated : Feb. 18, 2021 Despite these macro headwinds, management believes Linde is well-positioned for the future. “Linde is heading into this uncertainty with the largest sale of gas backlog in company history, an incredibly strong balance sheet, and a lean and well-focused workforce with a proven track record in successfully navigating difficult conditions time after time,” CEO Sanjiv Lamba explained on the conference call. Linde has proven an ability to adjust quickly when it sees economic weakness ahead, just as it’s doing now. With Lamba expressing some concerns about continued softness, Linde is reducing its global workforce by 2% in the next few months to protect its profits. Quarterly results Linde’s sales increased 2.5% year over year and improved 1% sequentially. On an organic basis, which strips out impacts from cost pass-through and currency translation, sales grew 2% driven by price increases. Removing cost pass-throughs from the equation is a better way to look at Linde because those sales are simply changes in energy prices that it passes on to customers. They carry no impact to operating profit dollars. Volumes were flat in the quarter as growth from the project backlog was offset by weaker base volumes. Geographically, the Americas business was resilient. Revenues were flattish mostly due to unfavorable currency. More importantly, volumes and price/mix improved. Margins were a standout, increasing 230 basis points year over year thanks to ongoing price and productivity initiatives; a basis point equals 0.01%. The annual gains in volumes were driven by electronics, along with its chemicals-and-energy end market. On the other hand, the health care and metals-and-mining markets were slight drags. Revenues for its Europe, Middle East and Africa unit experienced were flattish on an annual basis, but that was mostly due to headwinds from cost pass-throughs and shouldn’t be counted. Price/mix contributed a 4% positive impact. However, volumes dipped 1% due to declines in the manufacturing and chemicals-and-energy markets. Margins were strong, increasing 230 basis points year over year when backing out cost pass-throughs. The Asia-Pacific segment was better than expected. Sales increased 5% year over year thanks to a 3% lift in volumes. The volume gains were led by project startups, mostly in the electronics industry. Margins were up 100 basis points, too. By country, Lamba said there was “short lived euphoria around the stimulus” announcements in China. India was a positive story. The company is the market leader there and expects consistent growth in the future. The backlog was a major bright spot in the quarter. It increased to $10 billion thanks to the largest gas project sale in company history. On Aug. 24, Linde signed a long-term agreement to supply clean hydrogen to Dow Chemical’s Fort Saskatchewan Path 2Zero project. Linde is making a more-than-$2 billion investment to provide atmospheric gas, low-carbon hydrogen and services for both CO2 capture and off off-gas cleanup. The project is expected to start in late 2028. Importantly, this investment met Linde’s rigorous investment criteria standards. If Linde pursues a big project, you can trust it was well-vetted and should earn a strong return. Other companies in the industrial gas space have a shakier track record at this, especially for clean hydrogen projects. Linde is far more selective when it comes to hydrogen, mostly pursuing low-carbon, or blue, projects like this. Guidance For the fourth quarter, Linde expects adjusted EPS in the range of $3.86 to $3.96, implying 8% to 10% growth compared with the year-ago period. The $3.91 midpoint is light compared with the FactSet estimate of $4.04. But, as mentioned, Linde said the middle of its guide assumes the economy contracts in the quarter — a justifiable decision considering the macro landscape. Management also is historically conservative with its outlook and has a strong track record of beating the numbers. The reported quarter is a good example of how Linde underpromises then overdelivers. Linde originally guided third-quarter EPS to $3.82 to $3.92, and the actual result of $3.94 was above the high end of the range. (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.

Tanks of hydrogen stand near a hydrogen electrolysis plant.

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Industrial gas supplier Linde reported a solid third quarter on Thursday, proving once again its ability to grow revenues and earnings in a sluggish macro and industrial environment.

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Linde falls after its guidance fails to wow the market. We've seen this movie before

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