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Morningstar | Linde Reports Solid First-Quarter Results; Raising Fair Value Estimate

We raise our fair value estimate for narrow-moat Linde to $175 from $173 after the industrial gas producer reported its first quarterly earnings following the integration of Linde’s and Praxair’s businesses on March 1. Our fair value estimate bump is largely due to time value of money since our previous update. Nothing in Linde’s first-quarter earnings release materially alters our long-term outlook for the firm, and we believe our thesis remains intact as management announced that the company is already starting to reap benefits from cost synergies from the Linde-Praxair merger.

Sales were flat year over year, as 3% volume growth and 2% price improvement were offset by 5% currency headwinds. Adjusted for currency, Americas posted 8% year-over-year sales growth, fueled by volume gains in its HyCO (hydrogen-carbon monoxide) business in the Gulf Coast as well as price improvement in its merchant and packaged gas businesses, while Asia-Pacific revenue increased 5% from the year-ago period thanks to robust demand in the electronics and chemicals end markets. Industrial production in EMEA remains sluggish, as volumes were flat and sales grew only 1% year over year, excluding 8% negative currency.

Linde delivered 12% adjusted pro forma EPS growth from the prior-year period, and management lifted its adjusted EPS growth guidance range for full-year 2019 to 9%-13% (excluding foreign currency headwinds), a 100-basis-point bump on both ends. Management remains confident it can deliver target cost synergies of $1.1 billion (including $900 million in annual run rate cost savings and $200 million in capital expenditure savings). Although the first-quarter results include only one month of combined operations, we are encouraged by progress made thus far and we continue to expect cost synergies from the merger to drive a meaningful operating margin expansion over the next few years.