A Leading Hydrogen Growth Stock

Summary

• LindeLIN
  is investing more in green hydrogen on stronger profitability outlook.
• Hydrogen as an energy source still has major drawbacks, but new technologies could fix some of its issues.

Linde PLC (LIN, Financial), the world’s largest producer of industrial gases by both market cap and revenue, is near or at the top of many of the markets in which it operates. Serving a wide variety of industries from health care to electronics, mining and more, the industrial gas giant provides high-purity and specialty gases such as oxygen as well as state-of-the-art gas processing solutions.

The company’s steady growth throughout its history has been due not only to growing demand for its products, but also to a superior business model. For large customers, Linde will build gas plants on site, which allows it to lock in contracts for 10 to 20 years that have built-in rate increases, ensuring predictable revenue streams.

Nowadays, Linde is taking some of the profits from its solid business and ramping up investments in a new source of growth: hydrogen. Hydrogen has long been known as a promising source of alternative fuel, but even though hydrogen fuel itself is clean burning, nearly all of it has historically been produced by light hydrocarbons via steam reforming. That’s set to change thanks to key technological advancements, which could make clean hydrogen viable at greater scale and, more importantly for Linde’s investors, produce the potential for double-digit returns.

Clean hydrogen: limited but viable

Linde is investing in two main was to produce clean hydrogen. The first is by utilizing renewable hydroelectricity to power electrolysis, while the second is via autothermal reforming with carbon capture.

In 2025, the company plans to bring its Niagra Falls hydrogen production plant online. The plant will use hydroelectricity generated by the waterfall to produce hydrogen via electrolysis. The main drawback of this plant will be that it will be taking hydroelectricity that could have been used for residential or other purposes, but even though the tradeoff will be too steep to implement this process on a large scale, it will still be useful for producing zero-emission hydrogen for smaller clients that Linde does not build on site for.

Linde has also signed several long-term agreements to produce hydrogen for large clients via autothermal reforming with carbon capture. Previously, competitor Air Liquide (XPAR:AI, Financial) was the only company that had successfully combined these two processes. Neither autothermal reforming nor carbon capture are new developments, but when successfully combined, they become one of the cheapest ways to produce low-carbon hydrogen at scale.

Using renewable energy to produce hydrogen is overall an inefficient use of clean electricity with today’s technologies, so except in cases where hydrogen is needed for industrial processes, it is usually better to just use clean energy directly and save the unnecessary extra step. However, Linde happens to specialize in those limited use-cases where hydrogen is the preferred method of decarbonizing, like refining, steel making and fertilizer production. Approximately 24% of U.S. CO2 emissions came from industrial processes in 2020 according to the Environmental Protection Agency, so while industry is not the biggest market for clean energy, it is far from negligible.

Using hydrogen power for things like transportation is less efficient than charging an electric vehicle on the grid from hydroelectricity, wind or solar, but the appeal is its comparative off-grid portability and the natural abundance of hydrogen, so hopefully the conversion process can be made more efficient in the future.

Seawater breakthrough

Aside from the above-mentioned factors, another big challenge that has kept the viability of hydrogen limited is the fact it needs to be produced from clean water. There are already concerns the world’s supply of clean water is dwindling due to factors such as overpopulation, technological advancements and climate change, so trying to bring hydrogen up to scale on clean water truly is not feasible.

Fortunately, this is one hurdle that is in the process of a solution. Researchers in China have developed a device that can directly split seawater to make hydrogen fuel without significantly increasing costs and without resulting in the device rapidly being corroded by the seawater. The breakthrough process was published in the scientific journal Nature on Nov. 30, 2022 by Heping Xie and colleagues. With further refinement, the researchers believe the device could even be used to recover other useful materials such as lithium from water.

While not directly relevant to Linde at the moment, this breakthrough demonstrates there is still plenty of potential for hydrogen as an energy source to evolve and grow.

Linde’s growth plan

According to Markets and Markets research, the hydrogen generation market is expected to grow at a compound annual rate of 10.5% through 2027. Combined with incentives from the U.S. Inflation Reduction Act, which cuts the cost of green hydrogen in half and brings the cost of blue hydrogen to parity with grey hydrogen, Linde has high hopes for its investments in hydrogen.

Hydrogen currently makes up less than 10% of Linde’s revenue, and while the company has not provided much concrete guidance on what it expects from hydrogen earnings growth, the company has reported it is allocating more than $33 billion to clean energy investments, most of which are related to hydrogen. To provide scale on how huge these investments are, Linde’s trailing 12-month revenue is $33.7 billion. The company insisted these are not speculative investments, and that it will only move forward with them if expected returns are in the double digits.

Valuation

With a price-earnings ratio of 42 and with a GF Value assessment of fairly valued, the stock does appear to have a valuation between fair and premium at the moment.

However, the fundamentals are strong, as shown by a GF Score of 91 out of 100. According to a historical study by GuruFocus, stocks with higher GF Scores tend to outperform stocks with lower GF scores.

Previously, Morningstar (MORN, Financial) analysts had expected the company to achieve a three-to-five-year revenue growth rate of 9.44%, so it seems very possible the investments in hydrogen and other clean energy could push the revenue growth rate into the double digits.

Disclosures

I/we have no positions in any stocks mentioned, and have no plans to buy any new positions in the stocks mentioned within the next 72 hours.