Investors debating whether the U.S. economy is heading to a hard landing or a soft landing and looking to diversify away from the crowded Magnificent Seven trade may want to take a close look at the shares of Linde Plc (LIN). It's a stock below Wall Street's radar and a good holding for a growing and a declining economy.
Linde is in a different business than the magnificent seven, industrial chemicals and engineering. But it shares with them a couple of things. First, it sells products with inelastic demand, like atmospheric gasses used by hospitals and process gasses utilized by a broad range of manufacturers, from food and beverage to mining.
Second, Linde operates in an oligopoly, sometimes duopoly or even monopoly markets, due to high barriers to entry, like local distribution networks and lock-in customer relations and contracts backed by minimum purchase riders.
In addition, Linde is a large player in its markets, especially in the industrial gas market, where the merger with Praxair gave the company a scale advantage over the competition.
Inelastic demand and high barriers to entry provide the company with a great deal of pricing power, while scale gives the company a cost advantage over the competition. They translate into higher top and bottom lines and a steady operating cash flow in economic expansions and contractions.
Last week, Linde reported full-year and fourth-quarter earnings, "beating and raising" for the 20th consecutive quarter. In addition, for the full year 2023, the company grew EPS by 16% and ended with a record ROC of 25.4%, confirming that Linde's business model can grow EPS by 10%+ regardless of the macroeconomic conditions.
Wall Street has taken notice. At the close of 2023, Linde joined a select group of companies that have beaten the S&P 500 index for five consecutive years. Only 12 companies of the 500 members have beaten the S&P 500 index every year since 2019 (when Linde plc began operations), despite an adverse market environment of a pandemic and a war.
"Linde has guided its full-year 2024 adjusted earnings per share guidance to a range of $15.25 to $15.65, signaling a notable year-on-year growth of 7-10%," says ZACKS Research, which has a neutral rating on the company. "In addition, Linde is committed to returning capital to shareholders. By emphasizing capital returns, the company is aligning its interests with those of its shareholders, demonstrating a commitment to providing them with value beyond share price appreciation."
Argus Research is even more upbeat, raising its price target for the industrial giant to $510 from $463 per share, suggesting a total return potential of about 18% from current prices, including the dividend.
"We expect Linde to benefit in 2024 from continued merger synergies and increased demand for its industrial gases," Argus said, adding, "The company has a strong presence in many defensive end markets, including healthcare, food & beverages, and electronics, that should generate consistent revenues even in a soft economic environment."
Meanwhile, MarketEdge sees the current technical conditions for LIN remaining strong, with the underlying indicators supporting the ongoing uptrend. "Over the last 50 trading days, compared to the S&P 500, the stock has performed in line with the market," MartEdge said. "The stock is above its 200-day moving average which is pointed up, indicating that the intermediate term trend is bullish."
Still, ZACKS Research is concerned about the growing competition in the industry. "Growing competition for new projects and advancements in emerging markets is a source of concern, as it has the potential to impact the company's overall investment returns. The decline in free cash flow over the trailing 12 months is another woe for the company. In fact, free cash flows have been persistently declining since mid-2021," it said.
(Disclosure: The author owns shares of Linde)
