The global industrial gas giant has little competition in products with inelastic demand, which means that Linde has a great deal of pricing power in both good times and bad times and can offset rising costs on the supply chain.
"LIN was able to realize meaningful price gains even in the down volume Covid-period last year," says Barclays Equity Research. "Now that volumes are coming back, the sequential data shows an uptick in pricing. The outlier is APAC, where price increases have been +1% for four quarters in a row even as volume has grown 7% and 10% over the last two quarters. We believe Linde can increase the rate of price increases per quarter as the year progresses more than offset cost inflation and pushing margins even higher."
Price hikes, in turn, help generate a good stream of earnings and free cash flow to reward its stockholders with dividend hikes and share repurchases.
On May 6, Linde reported the 9th consecutive quarter of what it calls "beat and raised," beating consensus earnings per share estimates by $0.24 and raising full-year guidance by $0.50.
Societe General is also bullish on Linde. They point to soaring margins and cash flow as primary reasons. Q1 adjusted Ebit grew 25% year-over-year to $1.688 billion and adjusted EPS rose 32% to $2.49. Q1 operating cash flow grew 57% to $2.109 billion, with free cash flow up 148% to $1.347 billion, representing 18.6% of sales. The ratio of operating cash flow to Ebitda was 87% vs. a five-year average in the mid-60s.
Solid free cash flow has allowed the company to raise its dividend every year since 2018, when it merged with Praxair, Inc. This strong dividend will likely be able to "protect" shareholder income from inflation by offerring cash returns that will hopefully not be surpassed by inflation numbers.
Then there's also Linde's $5 billion share repurchase program announced on Jan. 25, providing even more downward protection if higher inflation pushes the value of the company's shares lower.
The only problem for me is that it seems Wall Street has already priced in Linde's prospects. At $301, its shares trade well above the GF Value of $216.61. Thus, if I were a new investor, I might wait for a better entry point, though I am comfortable holding the shares I do own.
Disclosure: I own shares of Linde plc.
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