Investing.com — Shares of Air Liquide (OTC:) fell on Thursday after Morgan Stanley downgraded the inventory to “underweight,” pointing to issues a couple of looming cyclical slowdown in its conventional buyer base.
At 8:20 am (1220 GMT), Air Liquide was buying and selling 2.3% decrease at €164.58.
The brokerage, which set a value goal of €149 per share, cited restricted upside potential after the inventory’s current outperformance in European markets.
Morgan Stanley’s analysts acknowledged that Air Liquide has been executing at a excessive degree, delivering on its revised targets and capitalizing on the worldwide power transition.
“The group is working at a high-level and the shares have outperformed most defensive European names by 40% since 2019,” the analysts stated.
Air Liquide’s wins in power transition tasks and consolidation throughout the trade have additional strenghtened its place. Nevertheless, the analysts cautioned that sustaining this degree of efficiency might show troublesome within the face of rising challenges.
A key concern highlighted is the potential deceleration in progress from Air Liquide’s conventional buyer sectors, together with refining, chemical compounds, and metals.
These industries, important to Air Liquide’s Giant Industries enterprise, are projected to scale back capital expenditure (CapEx) by roughly 1% over the subsequent three years.
This discount is noteworthy as a result of the corporate’s progress, particularly in new onsite tasks, depends on the enlargement of its buyer base relatively than simply sustaining present operations.
Morgan Stanley means that the present share value might not absolutely account for these anticipated challenges, notably the anticipated slowdown in capital investments.
Regardless of the slowdown, Air Liquide has positioned itself as a key participant within the power transition, benefiting from decarbonization tasks that might drive long-term progress.
“The normal buyer capex which drives the profitability of Giant Industries enterprise is about to sluggish. The offsetting power transition will begin in ’26,” the analysts stated.
This delay might create a spot in progress over the subsequent couple of years, leaving the corporate extra uncovered to the cyclical downturn in its conventional markets.
The analysts identified that whereas Air Liquide has introduced a number of new energy-related tasks, their contribution to earnings will likely be delayed, and present valuations aren’t pricing on this lag.
One other issue weighing on the outlook is Air Liquide’s pricing energy in its Industrial Service provider enterprise, which has benefitted from trade consolidation. Over the previous few years, the corporate has loved elevated pricing leverage, driving margin enlargement.
Nevertheless, Morgan Stanley now sees restricted room for additional value will increase, suggesting that the pricing cycle has reached its peak. Whereas value degression is just not anticipated, the brokerage anticipates a “potential value ceiling,” signaling that additional margin progress could also be constrained.
This normalization in revenue progress might additionally go away the corporate susceptible to earnings downgrades, notably as consensus forecasts at the moment mission an optimistic 7.8% EBITDA progress for 2025, which Morgan Stanley sees as a stretch.
Air Liquide’s funding backlog has entered a slower part. This backlog displays the whole worth of accepted tasks which have but to begin and is a key driver for the corporate’s Giant Industries enterprise, which caters to main clients in sectors corresponding to refining and chemical compounds.
Morgan Stanley means that the slower tempo of latest funding choices might restrict future progress, notably as CapEx from Air Liquide’s conventional clients is anticipated to flatten. This displays broader market traits, with industries like petrochemicals, particularly in China, pulling again on enlargement after a interval of over-supply.
One vivid spot within the report was the potential for progress within the electronics sector, which is anticipated to speed up in 2026 and 2027.
The analysts pointed to onshoring packages within the U.S. and developments in expertise that might drive increased capital funding within the sector.
Nevertheless, this uptick in electronics-related demand is unlikely to offset the cyclical downturn in Air Liquide’s different core markets within the close to time period. The outlook for electronics, whereas constructive, is simply too far into the longer term to mitigate the rapid challenges posed by the slowing CapEx from conventional industrial clients.
Vitality transition stays a vital long-term progress driver for Air Liquide, notably with its deal with hydrogen manufacturing and industrial decarbonization.
The corporate has secured quite a few mission wins in recent times, positioning itself to capitalize on the worldwide shift in direction of cleaner power.
“We word that whereas the expansion is excessive all through the interval the extra significant additions will begin in ’27E and past,” the analysts stated.