This Industrial-Gas Giant Is Investing Big in Hydrogen. It’s Time to Buy the Stock.
The thunderous force of the Niagara River above the famous falls will soon power a plant three miles away as it pumps out clean energy in the form of hydrogen. It heralds an exciting future for a century-old company, Linde LIN –2.54% , whose bets on low-carbon power look increasingly likely to pay off.
Linde (ticker: LIN) is the world’s largest industrial-gas company, part of an oligopoly of gas producers that operate around the world. For large customers buying gases such as oxygen or nitrogen, Linde builds gas plants on-site and locks in contracts for 10 to 20 years with built-in price escalators. It’s a business model that has produced steady earnings growth.
The Niagara Falls plant, slated to open in 2025, is a new part of its growth story. It will use carbon-free hydroelectric power to make hydrogen, a clean-burning gas useful in industries like refining, steel-making, and fertilizer production. Hydrogen now represents less than 10% of Linde’s sales, but analysts see it growing in importance as the company invests in projects worth tens of billions of dollars. Linde has already found creative uses for hydrogen. It won a first-of-its-kind contract to power a Norwegian ferry with hydrogen, a sign of the element’s growing role in transportation.
Earnings from clean hydrogen could take a few years to appear, but Linde has nearer-term growth drivers, too, including major new contracts with semiconductor fabs. Analysts’ earnings estimates have been rising. When Linde reports earnings next week, they expect the company to have earned $12.07 per share for the year, 13% more than in 2021 and 47% more than 2020. Wall Street sees a 50% jump by 2027.
A potential buying opportunity recently opened up for investors. Since late last year, Linde stock has trailed its peers, largely for technical reasons. It’s down 2% in the past two months, versus a gain of 8% for competitor Air Liquide (AIQUY). Linde recently decided to delist from the Frankfurt stock exchange. Some three-quarters of its trading already occurs on the New York Stock Exchange, but analysts think that forced selling by European funds spurred by the delisting has weighed on shares and could be a hangover for a month or two more.
BMO Capital Markets analyst John McNulty urged investors to “use any weakness as a buying opportunity” and sees “upside potential beyond our $370 target price.” At a recent $332, Linde trades at 25 times expected earnings, below Air Products & Chemicals APD –3.55% (APD) at 26 but above Air Liquide at 23.
Linde gets about $3 billion of its $34 billion in annual revenue from hydrogen, though the processes it uses are not so environmentally friendly. Newer methods are cleaner and will be key to decarbonizing industries.
Hydrogen won’t be as big as traditional renewables like solar and wind, but it has capabilities that those technologies lack. It is combustible and can replace fuels like natural gas in factories, and it can be transported in liquefied form across oceans. For the world to get to a net-zero emissions goal by 2050, hydrogen would have to account for 2% of total global energy use by 2030 and 10% by 2050, compared with 0.1% in 2020, projects the International Energy Agency, or IEA.
There are several ways to produce hydrogen, and they vary in their environmental impact. Almost all hydrogen today is produced by combining natural gas with steam, which separates carbon and hydrogen, creating a product known as “gray” hydrogen. At least two methods can reduce or eliminate the carbon emissions from the process.
One, which makes “blue” hydrogen, captures carbon emissions from natural gas and stores them underground. Linde is already working on blue hydrogen projects. The other method is cleaner, producing “green” hydrogen by separating hydrogen and oxygen in water with a device known as an electrolyzer. If the energy required for that reaction is powered by renewable electricity—like Niagara Falls’ hydroelectric power—the process should be carbon-free. In 2021, water electrolysis accounted for 0.1% of hydrogen production, but electrolyzer capacity was on track to nearly triple by the end of 2022, and rise nearly 100-fold by 2030, according to the IEA.
Government subsidies are fueling the growth. The U.S. Inflation Reduction Act includes lots of support for the industry, bringing the cost of blue hydrogen nearly to parity with gray, and making green hydrogen eligible for subsidies that cut its cost by half.
“The Inflation Reduction Act brings forward projects that otherwise might have been economic several years from now, or may have required further innovation or R&D,” says Jared Mann, an analyst at Neuberger Berman. Linde is the largest holding in the Neuberger Berman Carbon Transition & InfrastructureNBCT –1.32% exchange-traded fund (NBCT), which Mann helps manage.
Linde hasn’t released many details on earnings expectations from hydrogen, but says it’s pursuing more than $33 billion worth of U.S. clean energy investments, the vast majority related to hydrogen. Those are not speculative investments, the company insists. Linde will move forward only if customers are lined up and expected returns are in the double digits.
If hydrogen works as expected, it will be as invisible as the element itself: a carbon-free energy source that operates in the background of our lives. It will certainly be noticeable to companies like Linde, however, and investors who buy at the right time.