EUR 850.00 For Business Accounts Only

Morningstar | Linde’s efficiency programs plus new project startups should drive rising margins and ROICs.

Narrow-moat Linde is steadily reshaping itself as it seeks to boost margins and returns on investment in its core industrial gas, or IG, business.IGs typically make up a small portion of a customer's cost structure, but they are essential to the economic, safe, and efficient manufacture of high-volume commodity energy, metals, and petrochemicals, as well as high-value specialties such as semiconductors, commercial lighting, and medical diagnostics. Countercyclical sectors such as healthcare and food/beverage constitute roughly 25% of gas revenue, while less correlated electronics and aerospace are also meaningful.In addition, IGs may be used at multiple steps of a given process, including basic production, refining, distribution, waste treatment, and maintenance. New applications drive long-term demand growth at 1.2-1.4 times GDP. Larger opportunities include nonconventional and alternative energy from enhanced oil recovery, fuel cells, and biofuels, as well as environmental uses including NOx emission reduction and carbon dioxide sequestration. The industry is capital-intensive, so prioritizing among opportunities is a critical element in long-term success.In return for reliable gas supply, expertise, and capital savings, major gas customers commit to take-or-pay supply contracts of as long as 20 years. Contract terms imply attractive returns on Linde's initial capital outlay and often index gas selling prices to electricity or natural gas costs, which helps stabilize margins.Despite structural positives, Linde's financial performance has lagged its global peers for more than a decade. EBIT margins trail its nearest peer by more than 250 basis points, and returns on invested capital trail by 200-400 basis points. We attribute this to a series of expensive acquisitions and persistently high SD&A costs.Sluggish global industrial activity, weak energy prices and lingering Brexit uncertainty are near-term negatives. In June 2017, Linde and Praxair entered a Business Combination Agreement for a merger of equals. Assuming it can gain regulatory and other approvals, a combination could create the industry's largest supplier and generate $1 billion in synergies.