Linde extends its streak of earnings beats, flexes ability to handle any economy

Linde on Friday reported another impressive quarter, as the industrial gas supplier continues to demonstrate its reliability and value in a diversified stock portfolio. Revenue in the second quarter totaled $8.27 billion, a bit shy of the $8.32 expected by analysts, according to estimates compiled by LSEG. On annual basis, overall revenue was up 0.8%. Adjusted earnings per share (EPS) rose nearly 8% year over year to $3.85, topping expectations by 7 cents, LSEG data showed. Adjusted operating profit in three months ended June 30 was $2.42 billion, up 5.9% on an annual basis and ahead of the $2.36 billion estimate, according to FactSet. 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 Bottom line Linde’s hallmark consistency was on display in Friday’s earnings report, headlined by higher-than-expected profits per share for another quarter. Over the past five years, Linde has topped EPS estimates in every quarter, according to FactSet. Shares fell 1.4% on Friday — hardly cause for concern considering the carnage in the broader market. The S & P 500 was down more than 2%, as was the materials sector in which Linde resides. Linde is among the best-performing stocks in the group, a reflection of not only its results but its defensive nature in general. We’re not the only investors who have come to covet the company’s ability to deliver steady earnings growth regardless of the economic conditions. Among the highlights: A better-than-expected adjusted operating margin, which at 29.3% was up solidly year over year and compared with the first quarter. Linde’s largest geographic segment — the Americas, which covers its operations in North America, Latin America and South America — also exceeded estimates on the top and bottom lines. On the conference call, executives at the oxygen and hydrogen supplier told a compelling story, reminding investors that while their forward guidance assumes no pickup in economic activity, parts of their business are exposed to resilient end markets like food and beverage that aren’t highly dependent on industrial production. Indeed, Linde’s revenue for food and beverage business was up 8% year over year in the quarter, and CEO Sanjiv Lamba said he expects to see continued growth in that segment. It represented 10% of gas sales in the April-to-June period. LIN YTD mountain Linde’s year-to-date stock performance. Of course, some of Linde’s end markets like manufacturing are more cyclical, and analysts pressed management on whether the company would be able to deliver double-digit earnings expansion if economic conditions in the U.S. and abroad get worse in the coming quarters. It’s a reasonable line of questioning because, as we’ve seen in the market Thursday and Friday, the health of the economy is a big concern for investors. In response, Lamba reiterated Linde’s confidence in its EPS growth targets, arguing the company has been able to execute on them despite battling through an effective “industrial recession” over the past four or five quarters. It relies on a mix of backlog projects starting up, pricing and productivity improvements, volume growth, and share repurchases to grow earnings. But if there is a worsening of economic conditions, Lamba said Linde will take action quickly to protect profits. Lamba offered upbeat commentary on Linde’s electronics operations, where revenues rose 7% on an annual and sequential basis and amounted to 9% of gas sales in the quarter. Linde is seeing early signals of an electronics recovery, Lamba said. The first phase of Linde’s project in Arizona to supply gases to Taiwan Semiconductor Manufacturing Company ‘s sprawling facility under construction in the state has commenced, Lamba said. And bigger picture, Linde will continue to benefit from an increase in chip production capacity, driven by the growth of data centers and artificial intelligence computing. The long-term outlook remains “very robust,” and Linde is well-positioned to win “more than our fair share” of business in that industry, he said. Perhaps the biggest blemish in the quarter was operating cash flow, which declined 10% year over year to $1.93 billion and missed Wall Street estimates. However, CFO Matthew White said the metric was impacted by the timing of project prepayment in its engineering unit during the quarter. More generally, White said Linde is seeing more seasonal effects on operating cash flow that are leading to full-year performance being loaded in the back half of the year. “That was just a very solid quarter,” Jim Cramer said Friday. We’re maintaining our 2 rating and $500 price target on the stock. Quarterly results As seen in the chart above, it wasn’t a perfect quarter. However, the earnings and companywide margin beats are notable. Linde’s underlying sales — which remove the variable energy costs — rose 3% year over year in the quarter, driven by higher prices. Volumes were unchanged annually. Given the importance of Linde’s industrial gases to its customers, it has the ability to pass through its higher costs through price hikes. Over the long term, Linde’s prices trend slightly higher than a globally weighted inflation index, Lamba said Friday. Geographically, the strength of the Americas business stands out, particularly on operating profits, which were up 8.3% year over year. Volumes in the business were flat year over year, but up 2% compared with the first quarter. Its Europe, Middle East and Africa unit was less impressive on the top line. But operating profit of $704 million and adjusted operating margin of 33.7% exceeded expectations. On a sequential basis, the segment experienced 2% volume growth, helped by an uptick in food and beverage, as well as manufacturing. In Linde’s Asia-Pacific segment, revenue and operating margin came up short of expectations. The company is grappling with some pricing pressures on helium, which is used in electronics manufacturing in that region and deflation in China more generally. Volumes were up 4% compared with the first quarter. Guidance For the third quarter, Linde expects adjusted EPS in the range of $3.82 to $3.92, implying 5% to 8% growth compared with the year-ago period. The midpoint of that range came in a bit light compared with the FactSet estimate. As usual, the middle of Linde’s guidance assumes no economic improvement. The company narrowed its full-year EPS range to $15.40 to $15.60, up 10 cents on the low end. On a currency-neutral basis, that guidance continues to imply growth between 9% and 11%. Its capital expenditure outlook of $4 billion to $4.5 billion is unchanged. “We have not seen enough encouraging signs to be bullish on the second-half economic activity. So we are essentially leaving the guide intact,” while tweaking the bottom end to reflect its second-quarter performance, CFO Matthew White said on the call. “Rest assured, if the economy does better, we’ll capture that incremental benefit and if it does worse, we will take actions to mitigate the impact to earnings.” (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 . 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