Linde Earnings: Impressive Margin Expansion Continues as EMEA Delivers Over 30% Operating Margin

Narrow-moat-rated Linde LIN delivered strong third-quarter results, featuring a 17% year-over-year increase in adjusted EPS, and raised its full-year guidance for the third time this year. Management now anticipates adjusted EPS of $14.00-$14.10 (up from $13.80-$14.00), which assumes no economic improvement in the fourth quarter at the top end of the range. We’ve raised our fair value estimate to $393 from $379, which reflects our more optimistic operating margin assumptions and time value of money.

Linde’s third-quarter underlying sales increased by 3% from the same period last year, as 5% higher pricing was partially offset by a 2% volume decline. Volumes remained flat in the Asia-Pacific, where softness in the metals and mining as well as electronics end markets was offset by contribution from new project startups, but declined by 2% in the Americas and 4% in EMEA.

We remain impressed by Linde’s continued strong margin expansion, as third-quarter adjusted operating margins excluding cost pass-through increased by 400 basis points year over year and 40 basis points sequentially. EMEA’s adjusted operating margin of 30.1% came in above Americas’ 29.6%, though the latter had to contend with higher power costs that management expects to recover within one or two quarters. Compared with 2018 levels, operating margins have improved by roughly 900 basis points in APAC and 1,100 basis points EMEA, and management aims to continue expanding margins by around 20-50 basis points annually.

Despite an uncertain macroeconomic environment, we remain optimistic about Linde’s long-term prospects. The industrial gas firm has a resilient business model and a strong track record of driving margin improvement. Furthermore, Linde ended the quarter with an $8.1 billion backlog, and we believe that the company is well-positioned to benefit from growing investment in blue and green hydrogen.