Here’s why Linde shares have dropped so much this week but why we still like it long term
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by 0 It’s been a tough start to 2023 for shareholders of Linde (LIN). The industrial gas giant was a relative winner in 2022 with its stock declining roughly 5% compared to the S & P 500 ‘s drop of around 19.4%. But the new year has not been so kind with three straight down sessions, including nasty pullbacks Tuesday and Thursday. For such a high-quality company with a track record for delivering consistent, double-digit earnings growth, this is not the stock price performance we have come to know for Linde. Let’s take a look at some of the recent news that’s negatively impacting the company to figure out if this pullback is a buying opportunity. Russia freezing Linde assets First off, while U.S. markets were closed to observe the New Year holiday, Reuters reported Monday that a Russian court froze about $488 million of Linde assets. The legal action was at the request of a Russian joint venture that Linde stopped working on. The halt in the business relationship was done to comply with European Union sanctions after Russia invaded Ukraine. Long story short, Linde was prepaid $1.8 billion for work on a project, and Russian energy giant Gazprom is suing Linde to get that money back. It’s all pretty technical, but here’s what an analyst at BMO Capital Markets said about the news: “High level, we view this as a negotiation tactic tied to LIN’s suspension of the project and the eventual settlement of accounts. As a reminder, LIN holds ~$1.8B of cash/payments from Gazprom and its partners for the Ust-Luga gas complex (LIN lists this as a liability on its bal sheet). With LIN having stopped work on the project, it will be expected to return the $1.8B of proceeds minus the hours worked and the value of the equipment (both currently being negotiated). The freezing of the assets and valuing them at $488mm is simply part of that ‘negotiation.'” We’re not in the business of trying to predict the legal outcome or how negotiations will go, but what you do need to know is that Linde lost about $3.9 billion of market value Tuesday, as traders in the U.S. got their first chance to react to the news. That’s far beyond the value of what Linde was paid to complete this project. Therefore, we see the recent pullback as an overreaction. The next question is does any of this matter to future earnings? The answer here is no. Shortly after Russia invaded Ukraine, Linde suspended business in Russia and announced plans to scale back operations. This means Russia has zero impact to forward earnings per share; it was excluded from Linde’s full-year 2022 guide and should not be factored into any analyst estimates for 2023 earnings. Again, we think the news was an overreaction. Upcoming Frankfurt delisting vote There is a second factor likely contributing to some of Linde’s declines over the past few days and it is harder to quantify. It relates to management’s proposal to delist from the Frankfurt Stock Exchange. Linde is currently listed on two different stock exchanges: the New York Stock Exchange in the United States and Germany’s Frankfurt Stock Exchange. Through extensive analysis, management concluded that a single stock listing in the U.S. could expand Linde’s valuation , which would benefit current shareholders. The voting on this proposal ends on Jan. 17 and should be known the day after at a shareholders’ meeting. If Linde shareholders approve the German delisting — and we think they will — some of the European investors and index managers who own the stock will be forced to sell because of restrictions. For example, some managers may be limited to only owning European listed stocks or track the German blue-chip DAX index. If Linde only trades on a US line, they can no longer hold it. While this forced selling could stretch out, what we think is happening Thursday, in the absence of any fundamental news, is that European investors trying to get ahead of the results of the vote. Declines in Linde’s industrial gas peer Air Products and Chemicals (APD) are relatively in line with the broader market selloff of more than 1% on the major benchmarks. Linde slide Thursday was more than 3%. Bottom line So, what are we doing with the stock? When we wrote our delist story in November, we said if there is a pullback related to so-called forced selling closer to the key dates, we would treat those declines opportunistically and look to buy. Linde is the type of company that can continue to perform well in a slowdown because of the resilience of its gas-selling markets, its pricing power, and productivity initiatives. Linde also has a huge opportunity to support the advancement of clean energy initiatives promoted through the U.S. government’s Inflation Reduction Act. And as we mentioned above, the Russia legal issues won’t have a material impact on Linde’s overall business. With some of the selling beginning to flush out but no changes to our positive long-term fundamental view, we are getting closer to upgrading our rating and potentially adding to our position. Linde is scheduled to report its fiscal fourth-quarter earnings on Feb. 7. While that may feel like a lifetime from now, at some point the fundamentals will matter again and all this technical pressure will take a back seat. We’re looking at a price at or below $300 to upgrade Linde back to a 1 rating as we have found that the company typically likes to ramp up its buyback program at those levels. We should note that Linde’s buyback is temporarily on pause until the upcoming shareholders’ meeting. It can resume repurchases afterward but under a predetermined plan until earnings. In our system, a 1 rating means we view the stock as a buy. Linde is currently a 2 rating, which means we’re waiting for a pullback to consider buying. (Jim Cramer’s Charitable Trust is long LIN. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
A liquid hydrogen tanker truck taking a fuel delivery at the Linde hydrogen plant in Leuna, Germany, on Tuesday, July 14, 2020.
Rolf Schulten | Bloomberg | Getty Images
It’s been a tough start to 2023 for shareholders of Linde (LIN).
