Despite challenges faced in the preceding year, the chemical sector is primed for a revitalization in 2024. Rising demand, favorable regulatory environment, and industry-wide commitments to sustainability, decarbonization, digitalization, and innovation are heralding a period of solid growth and prosperity in the coming years.
Keeping this in mind, I assessed the investment potential of Linde plc (LIN) and Air Products and Chemicals, Inc. (APD) in the current market landscape. Before delving into particulars, let's analyze the dynamics shaping the chemical industry.
Last year, chemical demand remained subdued, but a surge is forecasted for chemicals vital to the energy transition in 2024 and beyond. The upswing is being propelled by enduring policy impacts, fostering increased manufacturing reliant on these substances, buoyed by recent government incentives.
Additionally, the industry backs over 75% of emissions reduction technologies vital for achieving net-zero goals by 2050. Notably, it produces materials for EV batteries, heat pump refrigerants, and components for wind turbines and semiconductors. These demand catalysts are poised to elevate chemical production in 2024, with over 100 projects slated to commence operations.
Furthermore, within the sector, companies are shifting from isolated digitalization efforts to a holistic approach, integrating systems across operations and businesses. The transition is poised to enhance operational efficiency, enabling firms to effectively meet evolving market demands and maintain competitiveness in the industry.
The sector also sees a significant rise in AI adoption, leveraging Industry 4.0 tools such as IoT, digital twins, and robotics for data collection and process automation. Furthermore, AI and machine learning are being utilized to build predictive models, optimize operations, and proactively anticipate maintenance requirements, driving efficiency and innovation.
According to a MarketsandMarkets report, the top seven chemical sub-industries are projected to grow from $2.27 trillion in 2023 to $2.41 trillion by 2024, reflecting an 8% annual increase. The expansion will yield $165 billion in new opportunities in 2024, encompassing emerging technologies, sustainable solutions, materials, and energy transition initiatives.
In terms of price performance, APD has plunged 17.8% over the past month, while LIN gained 2.3% during the same period. Additionally, APD plummeted 25.4% over the past six months, closing the last trading session at $217.01, whereas LIN climbed 9.5% during the same period, closing the last trading session at $418.40.
But which Chemicals stock could be a better pick? Let's find out.
Recent Developments
On November 30, 2023, APD declared a significant achievement: 2,000 seagoing vessels worldwide actively employ its membrane-based nitrogen generation systems. Since pioneering the installation of such systems on ships in 1984, APD has led the industry, with its generators manufactured in Norway servicing ships from over 50 nations.
The milestone signifies an expanding market reach, bolstering APD's position as an industry leader and stimulating demand for its innovative solutions.
On January 25, 2024, LIN disclosed an expansion of its agreement for industrial gas supply with Steel Authority of India Limited (SAIL), a major steelmaking entity in India. The addition of 1,000 tons per day ASU at Rourkela significantly amplifies LIN's production capacity, positioning it to meet increased demand efficiently. This solidifies LIN's presence in the Indian steel market, fostering immense growth.
Recent Financial Results
For the fiscal 2024 first quarter that ended December 31, 2023, APD’s sales decreased 5.6% year-over-year to $3 billion. Its cash inflow from operating activities declined 12.9% from the year-ago value to $626.60 million. Moreover, cash outflow from investing activities widened by 550.1% from the prior year’s period to $1.67 billion.
For the fiscal 2023 fourth quarter that ended December 31, 2023, LIN’s sales increased 5.1% year-over-year to $8.30 billion. Its operating profit grew 20.2% from the year-ago value to $2.03 billion. Furthermore, the company’s cash inflow from operating activities rose 30.2% from the prior year’s period to $2.73 billion.
Past and Expected Financial Performance
Over the past three years, APD’s revenue and EBITDA increased at a CAGR of 11.4% and 5.4%, respectively. Moreover, its net income and EPS grew at respective CAGRs of 7.3% and 7.2% over the same time period.
For the fiscal 2024 second quarter ending March 2024, analysts expect the company’s revenue to reach $3.07 billion, indicating a 4% year-over-year decrease. Also, APD’s EPS for the same period is expected to decline 1.4% from the previous year’s quarter to $2.70. Moreover, APD missed the consensus revenue estimates in three of four trailing quarters.
LIN’s revenue and EBITDA rose at a CAGR of 6.4% and 11.3%, respectively, over the past three years. In addition, its net income and EPS increased at a CAGR of 35.3% and 38.8%, respectively, over the same time frame.
The consensus revenue estimate of $8.41 billion for the fiscal 2024 first quarter ending March 2024 reflects a 2.6% year-over-year increase. Moreover, the company’s EPS is expected to grow 7.4% from the prior year’s quarter to $3.67. Also, LIN topped the consensus EPS estimates in all four trailing quarters.
Profitability
LIN’s trailing-12-month revenue is 2.6 times that of what APD generates. Moreover, LIN is more profitable, with a trailing-12-month gross profit margin of 46.76% compared to APD’s 30.55%. In addition, LIN’s trailing-12-month EBITDA margin and trailing-12-month cash from operations of 36.66% and $9.30 billion compare with APD’s 32.61% and $3.11 billion, respectively.
Valuation
In terms of trailing-12-month PEG, APD is trading at 6.37x, 911.1% higher than LIN’s 0.63x. However, APD’s trailing-12-month EV/Sales of 4.83x compare with LIN’s 6.66x.
POWR Ratings
APD has an overall rating of D, which equates to a Sell in our proprietary POWR Ratings system. Conversely, LIN has an overall rating of B, translating to Buy. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. APD has a D grade for Sentiment, reflecting the alignment with pessimistic analyst estimates. Conversely, LIN holds a C grade for sentiment, reflecting its modestly favorable analyst projections.
Moreover, APD has a C grade for quality, correlating with its mixed profitability metrics. The stock’s trailing-12-month CAPEX/Sales of 42.16% is 455.6% higher than the industry average of 7.59%. However, its trailing-12-month levered FCF margin of negative 18.72% compare with the industry average of 4.74%.
On the other hand, LIN boasts a B grade for Quality, consistent with its higher-than-industry profitability. The stock’s trailing-12-month CAPEX/Sales and trailing-12-month levered FCF margin of 11.53% and 11.88% are 51.9% and 150.7% higher than the industry averages of 7.59% and 4.74%, respectively.
Of the 82 stocks in the Chemicals industry, APD is ranked #66, while LIN is ranked #28.
Beyond what we've stated above, we have also rated both stocks for Growth, Value, Momentum, and Stability. Click here to view APD’s ratings. Get all LIN ratings here.
The Winner
The chemical industry is poised for significant growth owing to the demand for energy transition materials, policy influences, and government support. With a pivotal role in emissions reduction technologies and advancements in digitalization and AI, companies stand to enhance operational efficiency and foster innovation.
Considering this landscape, while both APD and LIN could benefit from industry tailwinds, LIN emerges as a more favorable investment choice, given its superior historical growth, robust profitability metrics, and optimistic analyst projections at present.
Our research shows that the odds of success increase when one invests in stocks with an overall rating of Strong Buy. View all the top-rated stocks in the Chemicals industry here.
What To Do Next?
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LIN shares were trading at $424.66 per share on Thursday afternoon, up $6.26 (+1.50%). Year-to-date, LIN has gained 3.40%, versus a 5.18% rise in the benchmark S&P 500 index during the same period.
About the Author: Aanchal Sugandh
Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns.
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