While the Linde results were very strong and surprised to the upside, we also want to focus on what messages they send about the broader economy. As recently as 10 years ago all of the industrial gas companies' results provided a reasonable barometer on the state of the industrial and other parts of the global economy. Industrial gases are an enabling raw material or process gas for so many industries that their direct use is generally a function of operating rates for the industry that they serve. Over the last 10 years, Air Products has deviated from the traditional model, with some very large investments targeting specific projects in Asia and the Middle East and their results are a less useful measure of overall economic activity. While both Air Liquide and Linde continue to reflect the broad economic backdrop well, both could be dragged into large projects around hydrogen over the coming years, and depending on how they choose to report earnings, we could lose the tangential “information” in their reported results. For now, the Linde results are very supportive of the broader industrial-economic strength that is being reflected in earnings and guidance across many industries, including chemicals and refining. The company has added comparisons with 2019 to show how much underlying growth has happened over the two years. While inflation and interest rate increases could slow things down, the Linde numbers confirm that we have a very positive demand backdrop today, and the company’s guidance would suggest that they think it can continue.
Source: Linde 4Q21 Earnings Call Presentation, February 2022
Looking at the results in isolation, we have been big supporters of the industrial gas companies as good, somewhat hedged, investments with an ESG backdrop, as several initiatives to lower emissions could involve the increased use of hydrogen and oxygen, plus higher infrastructure spending will add demand to the packaged gas business, which is important for Linde (and Air Liquide). Linde took on a major challenge with the Praxair/Linde merger but seems to have delivered very well on synergies, and the most recent return on capital data suggests that the legacy Praxair investment and cost discipline have worked their way through the new organization. The additional benefit that the company has seen, which may belong in the “lucky” bucket, is that Linde Engineering has a much better project completion record than many of its competitors in recent years and is gaining more business as a result. The company is very well placed to benefit from more investment in traditional (SMR and ATR) and new (electrolysis) hydrogen capacity. Despite its high valuation on earnings, we still see Linde as a relatively safe way to play the chemicals sector. See more in today's daily report.