Despite the performance of shares in Linde this year, the company remains attractive as a long-term investment according to Bernard Horn of Polaris Capital.
In an interview published in this month’s issue of Value Investor Insight, Bernard revisited his Linde thesis, originally published in the second quarter of 2015. At the time the initial thesis was published, shares in Linde were trading at €175 with a 9% free cash flow yield. As one of only four companies that dominate the global industrial gas business, this valuation seemed to be too weak for Linde and severely undervalued the company’s prospects.
Nearly a year on and Linde’s shares now change hands for less than €131, so it seems the market doesn’t hold the same positive view on the company has Bernard.
However, the investor remains upbeat about the company’s prospects as the recent weakness can be attributed to “normal cyclical lumpiness” and he believes that the firm’s intrinsic value is still in the region of €190 to €200 per share.
Linde remains attractive despite recent weakness
Linde’s problems are a result of sluggish global industrial production growth, which has dampened the demand for its products around the world, especially in emerging markets. Furthermore, Brexit risks have resulted in European customers pulling back on spending. More specific to Linde, its US healthcare division, which provides home-delivered oxygen and respiratory services faces new Medicare and Medicaid reimbursement cutbacks for its services.
Nonetheless, Horn believes that Linde is still a great investment. He considers it a “well-managed company getting stronger through the downturn” and believes that many of the issues the company has had to grapple with over the past year can be attributed to “normal cyclical lumpiness we don’t get too excited about.”
Linde is making the most of the downturn in its key markets to use its scale to expand. At the beginning of the year, the company closed the acquisition of home health services company American HomePatient, adding $280 million in annual revenue to its already market-leading Lincare subsidiary. The government imposed reimbursement cutbacks will likely make deals like this more common as smaller companies that are unable to cope with lower imposed prices are taken out by larger more dominant peers.
When it comes to valuation, Linde hardly looks attractive at first glance. The company trades at a trailing P/E of 20.1 and a forward P/E of 16.9. Still, Horn estimates that Linde will earn around €2.4 billion in free cash flow this year giving a free cash flow yield of around 10% at current prices. Based on this, Horn pegs Linde’s intrinsic value at €190 to €200 per share — 50% above the current price — based on current lowered growth expectations.