Linde: Defensive by Design, Cyclical by Opportunity

"Wer rastet, der rostet."

– German proverb

Gases.

They are invisible. Odorless. And absolutely everywhere.

Every breath you take contains them. Every hospital relies on them. Every semiconductor, every steel beam, every rocket launch — none of it works without them (chart 1).

Industrial gases — oxygen, nitrogen, hydrogen, argon, carbon dioxide — are among the most essential inputs in the modern economy. They don't make headlines. But they make everything else possible.

How big is this market?

Over $100 billion globally. And growing.

The appeal is straightforward. Industrial gases are needed across virtually every sector: healthcare, chemicals, metals, electronics, food and beverage, energy. Demand is tied to industrial production itself — when the world makes things, it needs gases to do it.

But here's what makes this industry truly fascinating.

These products are commodities. Oxygen is oxygen. Nitrogen is nitrogen. There is no brand loyalty, no design advantage, no patent on the periodic table.

And yet — the companies that produce and distribute them earn some of the most attractive returns in all of industrials.

How is that possible?

That question leads us to a business that has been answering it for over 150 years.

The largest industrial gas company in the world.

Linde.

Chart 1: Industrial Gases – Introduction

Linde — Consistently Outperforming Peers and the Market

Linde is the largest industrial gas supplier in the world, operating in over 100 countries. It serves a broad range of end markets — chemicals, manufacturing, healthcare, steelmaking — and it does so from a position of dominance.

Together with Air Liquide and Air Products, the three form an oligopoly. Linde leads with roughly 30% market share. Its French companion holds around 24%. The American one comes in third at approximately 16%.

An oligopoly?

Yes. And you know we love those at arvy.

As of today, our portfolio of 31 businesses breaks down as follows: Monopoly (5.3%), Duopoly (20.8%), Oligopoly (47.5%), and Market Leaders in fragmented markets (26.4%).

Linde sits firmly in the Oligopoly section — and it benefits from operating in one of the most favorable industry structures we've come across.

Why?

Because despite selling products that are essentially commodities, industrial gas companies have consistently delivered lucrative returns. Thanks to their economic moats.

Selling a commodity but being attractively positioned?

How does that work?

Industrial gases typically account for just 1–5% of a customer's total costs — a tiny fraction. But they are absolutely vital. Without them, production stops. Period.

That dynamic changes everything.

Customers are willing to pay a premium and sign long-term contracts to ensure their operations keep running smoothly. Those long-term contracts — combined with enormous switching costs — form the backbone of the industrial gas moat. They generate predictable cash flows and attractive returns over decades.

Lucrative returns — again, in a business that sells a commodity?

How?

Because of the nature of the business itself.

The setup creates sky-high barriers to entry. Building production facilities costs billions and takes years. Once a Linde facility is integrated on-site at a client's plant — a common supply model in this industry — disrupting that setup could halt the client's entire operation. Switching providers isn't just inconvenient. It's impractical.

These barriers limit competition and allow established players to maintain pricing discipline — avoiding the classic commoditization trap.

Linde's business model adds another layer of insulation: long-term contracts spanning 15 to 20 years, with take-or-pay clauses that guarantee minimum purchases regardless of demand. These contracts include built-in price escalators tied to inflation or energy costs — providing predictable revenue and enabling steady profit growth even in downturns.

The result?

A defensive business model — 62% of sales are classified as defensive — providing significant downside protection (chart 2). Gross margins hover around 50%. Net income margins stand at 20%.

Sounds like a "Good Story" that's too good to be true.

So, what's the catch?

Chart 2: Linde's Defensive Business Model Provides Significant Downside Protection

Linde's Ability to Deliver in a Tough Underlying Market

Demand for industrial gases is strongly correlated to industrial production. So organic revenue growth will largely depend on global economic conditions.

The takeaway?

There is still a cyclical tilt to this story — even though the business model is defensively positioned. And recently, some investment signals have turned cautious. Most notably: a conservative near-term volume outlook.

Recall. A business can grow through two main ways — and a third, more opportunistic one.

1. Sell more (volume)
2. Increase prices
3. Cut costs

In Linde's case, management guidance for 2026 is considered conservative by the market. It explicitly assumes no increase in volumes. This has been the trend since 2021, driven mainly by soft industrial activity worldwide.

Not really promising, is it?

But here's where it gets interesting.

Why is Linde still so attractive?

Because the business still delivered 10% average annual EPS growth since 2022 — thanks to strong pricing, productivity initiatives, and excellent capital allocation. The ultimate compounder characteristics.

Let me say that again.

Its underlying market isn't growing. Literally zero volume growth. And the company keeps delivering double-digit numbers (chart 3).

Ok Thierry, this "Good Story," has piqued my curiosity.

Because what happens if growth comes back in industrial activity?

If industrial activity rebounds, Linde stands to benefit enormously. As a key supplier of essential gases to manufacturing, chemicals, metals, and mining, any uptick would amplify the operating leverage already built into its business model. Fixed costs from large-scale plants mean that incremental volumes translate directly into stronger margins and profits.

That would push profit growth to 12–15% — compared to its baseline of 7–9% during softer periods — supporting a long-term EPS compound annual growth rate exceeding 10% across full economic cycles.

Oh Thierry, you had my curiosity, now you have my attention.

Time to check the "Good Chart."

Chart 3: Linde's Strategy to Deliver 10%+ Annual EPS Growth

Linde Moves Like German Engineering Art — Precise and Process-Oriented

Linde has come a long way.

It all began in 1871 with Carl Paul Gottfried von Linde — essentially the inventor of the refrigerator. His original idea? A mechanical refrigeration system that allowed beer to be brewed during hot summers.

Kudos to Mr. Linde. The next time we enjoy a cold summer beer, we should raise a glass to him.

But Mr. Linde didn’t stop there.

True to the German saying, “Wer rastet, der rostet” — who rests, rusts — he expanded to the US and founded Linde Air Products Company in 1907. Those US assets were confiscated during World War I in 1917 and eventually evolved into what later became Praxair.

Fast forward more than a century.

In 2018, Linde effectively re-bought its former US offspring through the merger with Praxair — bringing the story full circle.

Founded in Germany, expanded globally, separated by war, reunited by strategy — Linde’s history reads almost like industrial poetry. Wars. Recessions. Geopolitical shocks. Financial crises. For more than a century, the company has delivered through it all.

And that endurance is reflected in its “Good Chart” (chart 4).

Resilient during hype cycles like Dotcom. Quick to recover during stress periods such as the Global Financial Crisis, China hard-landing fears in 2016, Covid, or even the inflation-driven bear market of 2022.

The originally German business seems to sit perfectly between defensive stability and cyclical upside — benefiting from durable demand while still participating meaningfully in economic recoveries. Linde occupies the sweet spot of the industrial cycle. Defensive by design, cyclical by opportunity.

It compounds capital the way German engineering builds machines.

Methodical, precise, process-driven.

And built to last.

Chart 4: Linde since the 1990s (log scale, adjusted for dividends)