On Wednesday, Linde (NASDAQ:NYSE:LIN), a leading industrial gas company, experienced a change in its stock rating. UBS downgraded Linde from "Buy" to "Neutral," while simultaneously raising the price target from $482.00 to $510.00. The adjustment was made due to concerns about slower earnings per share (EPS) growth and the company's current high valuation potentially limiting further stock appreciation.
The industrial gas giant, recognized for its top-tier performance, faces a valuation challenge according to UBS. The firm noted that Linde's forward multiples have returned to all-time highs, approximately 30 times the next twelve months (NTM) estimated price-to-earnings (P/E) ratio, compared to a five-year average of around 26 times. This heightened valuation creates fewer opportunities for near-term catalysts that could drive additional stock increases.
Despite the downgrade, UBS acknowledged Linde's ability to maintain a compound annual growth rate (CAGR) of over 10% in EPS, estimating around 12% over the next three years. However, UBS expressed skepticism that Linde could sustain the roughly 18% average EPS growth it achieved over the past four years without significant capital expenditure (capex) deployment.
Looking ahead, UBS sees Linde's new projects in the energy transition sector, such as blue and green hydrogen production and carbon capture, as beneficial additions to the market. These projects could support a higher multiple compared to historical figures. Nevertheless, given Linde's large scale and the two to three-year timelines for these projects, UBS anticipates that the impact on EPS growth expectations will be marginal.
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