Linde plc

Linde is the largest industrial gas producer in the world with projected revenues of approximately $30 billion in calendar year 2021. The company has over 80,000 employees and leading market positions in roughly 100 countries. The new Linde was created when Linde merged with Praxair in October 2018, consolidating the industry into three major players—Linde, Air Products, and Air Liquide. The successful merger-integration of Praxair and Linde, plus ongoing productivity and efficiency initiatives, continues to deliver sustainable value. The merger has joined Linde’s engineering expertise and strong presence in Asia and Europe with Praxair’s reputation for operational excellence and leading position in the Americas. The new company is global, including 38% of revenue in the Americas, 24% in Europe, and 21% in Asia. Linde products facilitate the production of medical gases, semiconductors, frozen foods, building insulation, cleaner fuels, and clean water—while simultaneously lowering CO2 emissions. By customer end-market, energy/refining accounts for 52% of revenues, electronics 29%, manufacturing 10%, chemicals 5%, and metals 4%. Management’s most important metric for managing the industrial gas business—average adjusted return on capital—has now grown from 13.5% at the time of the merger to about 16.5% today. At the end of 2020, a year of challenging economic conditions, management signaled confidence in business trends by increasing its dividend by 10%. This was the 28th successive year of dividend increase.

Competing in an oligopoly enables Linde to have good pricing power. Since industrial gases typically account for a relatively small fraction of a customer’s costs, but are critical to ensuring uninterrupted production, Linde’s customers are willing to pay a premium and sign long-term contracts of 10 to 20 years that index input costs (electricity and natural gas) against inflation. Switching costs for customers are high, as only a few companies can offer the volumes and infrastructure necessary to provide the gases reliably. Transporting gases in tank trucks or pressurized cylinders is expensive, so proximity is critical. On-site bulk plants, which provide large volumes, account for roughly 22% of Linde’s industrial gas revenues, while the company’s merchant business, in which tanker trucks deliver gas to customer storage tanks, accounts for 25%. Packaged gas in high pressure metal cylinders delivered by truck accounts for another 36% of revenues. The remaining 17% of revenues is primarily to gas distribution companies, who also sell some of the gas to Linde customers located outside Linde’s defined local territories.                   

Linde results have been solid the last few quarters, and the stock has appreciated at a 20% annual rate over the past three years. New on-site projects, further cost-synergies from the Praxair-Linde merger, and opportunities in carbon capture and green hydrogen may drive earnings growth over the next several years. The stock trades at a premium to the S&P 500, which we think appropriate given the market leadership and financial fundamentals.


Intuitive Surgical

Intuitive Surgical, founded in 1995 and headquartered in Sunnyvale, California, is a pioneer in robotic-assisted surgery and a global leader in minimally invasive robotic surgery with about 65% of the market and revenues of about $5.7 billion in 2021. The da Vinci surgical system, launched initially in 1999, was developed at the Stanford Research Institute and funded by a Defense Advanced Research Projects Agency (DARPA) grant to research and develop telesurgery for battlefield use. It received FDA approval in 2000 for general laparoscopic surgery and in 2001 for prostate surgery. Since then, Intuitive has added about 70 clinical specialties, including approved procedures for hernias, gallbladders, colons, hearts, lungs, the spleen, the pancreas, and other organs.

Robotic surgery was developed to address the shortcomings of traditional laparoscopy, a surgical procedure in which fiber-optic or other instruments are inserted through small incisions or ports in the skin to view organs or facilitate surgery. Minimally invasive surgery (MIS) allows certain surgeries to be performed through small ports rather than large incisions, resulting in shorter recovery times, fewer complications, and reduced hospitalization costs. The da Vinci surgical system provides better visualization, more precision, improved dexterity, and better outcomes and consistency versus traditional laparoscopy. The surgeon sits at an ergonomic console, looks into a 3D high definition screen, and manipulates the system using hand and foot controllers. One to four robotic arms are inserted into the patient through small incisions, and the robot offers advantages beyond human capabilities. The robot arms can rotate 360 degrees, the optics system offers 12-fold magnification, and the software filters out tremors to assist older surgeons. Patient recovery times tend to be shorter due to the less invasive procedures. Robotic tools can also reduce mistakes by surgeons, thus reducing readmission rates.

During the past twenty years, Intuitive revenues have grown at a near 30% annual rate. For the next several years, we expect revenues and earnings to grow at roughly 12% and 15%, respectively. Intuitive Surgical has over 6,700 da Vinci surgical systems installed in hospitals globally with slightly more than 50% of these systems in the U.S. Over 9.7 million lifetime procedures have been performed with more than 28,000 peer-reviewed clinical publications on da Vinci equipment and instruments. Intuitive also manufactures instruments and disposable accessories used during the robot-assisted surgery, along with warranties and service contracts to support the system. Consumables and services account for approximately 70% of total revenues, creating a recurring razor/razorblade-like model driven by surgical procedure volume.

There are new competitors working to enter the market, while we believe Intuitive can continue to succeed. The company has more than 4,000 patents, and invests more than 10% of revenues annually in research and development. Customers have high switching costs once surgeons have been trained on the system. We expect the new entrants to have some success as the robotic share of global procedures is currently less than 10% of the total. There is a large and long runway for transition to this new form of surgery, which should benefit a number of companies. We own an initial position and will look to increase the investment opportunistically.


Thesis Spotlight

The remarkable changes in the world due to COVID-19 have been positive for two of the core themes in your portfolio and have accelerated growth for these businesses in the past 12 months. These areas are innovation in life sciences research (16% of portfolio exposure) and digital transformation (20%). Just over ten companies comprise this 36% in exposure, which means there is considerable concentration in life sciences and digital transformation. We think long-term opportunity for these companies will remain strong.

Innovation in Life Sciences Research

Investments in Danaher, PerkinElmer, Thermo Fisher Scientific, and Bio-Techne comprise the vast majority of exposure to this theme. We have invested in the first three since the partnership’s inception, and Bio-Techne joined the portfolio in 2016. These companies provide the research instruments and consumable reagents that enable the world’s researchers at large biopharmaceutical corporations, biotechnology companies, government laboratories, and academic institutions to develop new breakthrough healthcare and environmental technologies. Their products are the picks and shovels for the gold miners—the companies striving to make the eureka discoveries. These companies played a major role in enabling the world’s response to the pandemic. Combined, the four generated nearly $10 billion in COVID-19 related revenues in 2020. The vaccines developed and manufactured by Johnson & Johnson, Pfizer, Moderna, and other companies would not have been possible without the products and services of these companies. Further, Danaher, Thermo Fisher, and PerkinElmer are the science leaders in providing the most accurate and rapid diagnostic tests for COVID-19 infection. The fact that these companies had strong results linked to COVID means some areas of their businesses will see revenue declines in 2022. Their astute management teams have anticipated this inevitability and have been utilizing the significant cash flows of the past twelve months both to increase internal R&D spending and to acquire further innovative products. We summarize acquisitions made by three of the companies to provide further insight.

Danaher (DHR) will have about $28 billion in revenues in 2021 across three areas: life sciences, diagnostics, and environmental. The board of directors named Rainer Blair as the new CEO in September 2020; he rose through the ranks during his 11-year tenure. We have met with him numerous times at the company’s investor meetings and believe he is an excellent choice to succeed the retiring Tom Joyce. The Danaher culture says, “Innovation is our future.” Blair’s emphasis on research and development fits this spirit perfectly; he has led an increase of 30% in R&D spending this year. A month ago, Mr. Blair announced Danaher is acquiring Aldevron for $9.6 billion, which demonstrated his conviction in the future growth opportunity of cell and gene therapy in genomic medicine. While Danaher paid a premium price for Aldevron, the company is growing sales at more than 20% a year and has the leading position in plasmid DNA, which is used to develop novel cell and gene therapies, and to apply technologies like CRISPR (clustered regularly interspaced short palindromic repeats). The accompanying image is a visual representation of an Aldevron product used in editing a T-Cell to evaluate specific activity of the TCR gene. With the number of gene-therapy candidates in biopharmaceutical pipelines now at over 1,000—a 10x increase in the past several years—the growth opportunity for Aldevron is robust. Aldevron strengthens Danaher’s life sciences research product set and increases the growth rate of the company.

ThermoFisher (TMO) is expected to generate $36 billion in revenues in 2021, and has four business segments all related to enhancing scientific understanding.  Thermo has an array of brands with the unifying concept of “Step Ahead. Step Beyond.” Long time CEO Marc Casper has executed on dozens of acquisitions. In April, he announced the largest acquisition in Thermo’s history: over $20 billion for the contract research organization, PPD, Inc. PPD is a leader in the management of clinical trials and clinical research services, has over 26,000 employees, and is expected to have over $5 billion in revenues in 2021 growing at a high single-digit rate. Thermo has traditionally focused on the analytic instruments and consumables—ranging from simple test tubes to complex engineered proteins—used in the pursuit of discovery. PPD is a services business and its associates will further integrate Thermo with its customers. The concept is to speed innovation to get therapies to market faster. Thermo generated $6 billion in revenues from speeding the process of fighting COVID. The revenues from PPD will help replace the decline in COVID-related revenues and make Thermo even more vital to its customers’ businesses.        

PerkinElmer (PKI) will produce revenues of about $4.4 billion in 2021 in two segments: discovery and diagnostics. Our initial investment, which dates back to the partnership’s inception, was based on PerkinElmer’s leading position in prenatal and neonatal diagnostic screening. Since then, management has been successful in diversifying the company’s product set. PerkinElmer has had the greatest relative positive impact to its business from the pandemic due to about $1 billion in incremental revenues in diagnostics. CEO Prahlad Singh has been with PKI since 2014 after joining from GE Healthcare. To make up for the coming drop in COVID revenues, he led the acquisition of six companies in the past nine months for over $1.2 billion. These include Oxford Immunotec and Horizon Discovery. On July 26, PerkinElmer announced the $5 billion acquisition of BioLegend, a research reagents business. This is by far the largest acquisition in the company’s history.

Oxford Immunotec provides a diagnostic test for tuberculosis and has innovative technology, which is potentially set to disrupt the $3 billion annual TB testing market. TB is the leading infectious disease resulting in deaths globally. It has overtaken HIV and claims about 1.5 million lives each year. In 2018, 1.7 billion people were infected by TB bacteria. Oxford’s test uses a proprietary T-Cell Select reagent kit with magnetic-bead based separation, along with software and automation protocols, to enable superior diagnostic performance to the existing products on the market. TB had been a 15% growth business for Oxford, with expanding gross margins. Along with PerkinElmer’s broader sales and marketing capabilities, Oxford should now be able to grow at least at this rate. Oxford gross margins are expected to increase to greater than 75%, which will help improve PerkinElmer’s mid 50’s gross margin level.

PKI’s Horizon Discovery provides gene editing and gene modulation services, and supports scientists on the path from research to therapy. PKI management paid a reasonable price: less than 5x revenues for this asset, which is growing at a double-digit rate. With over 2,000 customers, Horizon has a broad menu of products that span CRISPR modulation, gene knockdown and engineering, and cell line engineering.  The HAP1 cell line catalogue has over 10,000 well established knock-out cell lines trusted by research labs around the world. Haploid cells have a single copy of almost every human chromosome and are powerful tools for studying gene function. The acquisition increases PKI’s breadth of product, its importance to global scientists, and enhances PKI’s overall growth rate.

These summaries provide understanding for our commitment to the investments. We believe innovation in life sciences—from the gene editing that will cure diseases to the ozone analysis that is key to understanding global warming—will continue to play a major role in defining our world.

Digital Transformation

We have invested for many years in a number of companies that are helping the world move to a fully digital process. Core investments in this area include Ansys, Autodesk, EPAM, Gartner, and PTC, with an average investment tenure of over eight years. These companies have worked for years to enable customers to understand, design, develop, and manufacture faster and more effectively in a digital framework. With the acceleration of everything digital during the past year and a half, the managements of these companies have worked to ensure their businesses stay at the forefront of a rapidly changing world. We provide examples of how these companies are innovating to utilize digital technology to change the world.

Ansys (ANSS) has over $1.8 billion in revenues in simulation software, enabling the world’s leading manufacturers to simulate real world conditions in the computer. Ansys has led the simulation market for 50 years and is more than twice the size of its closest competitor. Companies like Airbus, Daimler, and Volvo use the proprietary multi-physics analysis from Ansys to explore and predict how products will or won’t work in the real world. For example, using Ansys Mechanical Structural Analysis software, a customer can determine the optimal shape for the wing of a plane. Some customers say that “it’s like being able to see the future.” During 2020, Ansys rapidly developed applications from its core software to help companies adapt their products or services to a COVID world. For the commercial aerospace industry, Ansys presented an approach for utilizing UV light disinfection (see image) in combination with cleaning robots to reduce the incidence of coronavirus on planes. The software calculates the necessary amount of irradiation, the motion of the robots, and the time required. It’s not yet clear how much incremental revenue this application has generated, but it provides insight into how Ansys software enables companies to assess many ideas quickly. In this case, Ansys offered the solution to some customers before they had even considered the idea. Users of the software can iterate through hundreds of simulations in hours—as opposed to the months that used to be required to develop prototypes and mockups of environments. Ansys is expected to grow consistently at a high single-digit rate and the stock trades at a high multiple. The smaller size of the position (2%) in the portfolio reflects the valuation risk, but we think the long term will be rewarding, and would consider increasing the investment in a market downturn.

EPAM Systems (EPAM) provides software engineering and development to an array of end markets and is expected to have over $3.4 billion in revenues in 2021. Our investment dates to 2014 and the stock is up over 16x since our initial investment, for about a 50% annual return. Our initial assessment of CEO Arkadiy Dobkin recognized that his excellent understanding of software development and his operational discipline were a strong combination, but his success has exceeded our expectations. EPAM serves as the outsourced software development team for companies, and in some cases has hundreds of EPAM staff working on an individual customer’s project for multiple quarters. The following summarizes their approach: “EPAM works in collaboration with its customers to deliver next-gen solutions that turn complex business challenges into real business outcomes.” EPAM has grown revenues at a rapid 25% annual rate and taken market share from numerous incumbents, but Mr. Dobkin is conservative and measured in his approach to predicting the business. During the outbreak of COVID, there was significant slowdown in growth, to 16%; despite this setback, and the pressure of having thousands of his software engineers less busy than usual, Dobkin provided fair and accurate expectations, while demonstrating great conviction in a return to future growth. The EPAM business culture believes data is the foundation of digital transformation initiatives, and the company recently acquired Just-BI, a small company that provides data and analytics services to drive digitization. We are now witnessing a strong bounce-back year, with revenues expected to be up about 30%.

PTC Inc. (PTC) is a global software company with over $1.7 billion in revenues across computer-aided design (CAD), product lifecycle management (PLM), and augmented reality (AR). PTC is an acronym for Parametric Technology Corporation, and PTC’s core product is a computer-aided design (CAD) system called CREO, which is the software of choice for large, sophisticated manufacturers like Caterpillar, John Deere, and Boeing. Jim Heppelmann has been CEO since 2010. He is an innovative thinker and a risk taker in his approach to capital allocation. Late in 2019, he went all in on the transition to the Cloud and announced the acquisition of Onshape—a Cloud-centric CAD company—for $470 million, while the company had only about $10 million in revenues. We felt the acquisition-multiple was extreme, at about 47x revenues, and while we respect PTC’s strong market position in CAD engineering software, we have gradually reduced the size of our investment. Onshape has had rapid growth since the acquisition. Management stated that Onshape had over 700 competitive takeaways in 2020, which is impressive. As one might expect, Mr. Heppelmann did not stand still during the past year, and in January the company closed on the largest acquisition in its history: Arena Solutions for $715 million. With $50 million in revenues in 2020 and over 1,250 customers, Arena grew at a double-digit pace during the year as its multi-tenant Cloud offering for PLM grew in importance for existing and new customers. In integrating Arena, PTC provides additional tools for companies to manage their businesses more effectively.  The accompanying visual summarizes Arena’s Cloud platform. The large software companies Oracle and SAP are strong players in PLM, which places PTC in a competitive market. Mr. Heppelmann believes the integration of PTC, Onshape, and Arena creates a superior technology solution. Time will tell, and we will monitor each step of the way.

Ansys, EPAM, and PTC are crucial to much of the world’s digital innovation. We maintain our emphasis on digital innovation, both in current investments and in the array of companies we continue to explore.

Company Review

Bio-Techne (TECH) Headquartered in Minneapolis, Minnesota


Bio-Techne, founded in 1976, is a relatively small, innovative bio-technology company focused on life science research and development, product manufacturing, and services. Bio-Techne empowers researchers in life sciences and clinical/diagnostics by providing high-quality reagents, instruments, custom manufacturing, and testing services to clients in global markets. The company has created a solid foundation for a sustainable future with deep scientific expertise and relevant scientific business experience. We have followed Bio-Techne closely since the late 1990s and Alpha has owned the stock for twelve of the past twenty years.


We have high conviction in Bio-Techne’s outlook. The company enjoys a reputation for the highest product quality and consistency in its core Protein and Antibodies portfolio. These characteristics enable pricing leadership in a marketplace where costs related to switching suppliers due to subpar proteins or antibodies are high. Other competitive advantages include a strong management team, a corporate culture that empowers and energizes the workforce leading to robust research and development and manufacturing productivity, high gross and operating margins, strong free cash flow, and an unlevered balance sheet. Bio-Techne has more than 350,000 products, 2,300 employees including 140 PHDs, and a large consumables business that accounts for 82% of total revenues. Instruments comprise 10% of revenues; services and royalties are the remaining 8%. The client base is research oriented. Pharma/biotech companies account for 38% of revenues, academia 23%, OEM 22%, and distributors 17%. By geography, 57% of revenues are in the Americas, 25% EMEA, and 18% are in Asia. Techne spends about 8.5% of revenues on research and development.


Bio-Techne’s sales and adjusted earnings have grown in the low double-digits during the past two decades; we expect the company to report revenues of approximately $890 million in the fiscal year ending June 30th, 2021. It is a very profitable enterprise. The company has no net debt, and its free cash flow generation this fiscal year should approximate 24% of revenues, exceeding net income by a wide margin. FCF has doubled during the past five years. Bio-Techne’s strong financial position enables management to invest in plant and equipment, research and development, and mergers and acquisitions as needed to strengthen the company’s competitive position and generate future growth. The company reports financially in the two business segments displayed below: Protein Sciences (75% of revenues and 90% of profits); and Diagnostics and Genomics (25% and 10%, respectively) as follows:




In the fiscal year ending June 2020, Bio-Techne was on the way to 10% organic revenue and double-digit earnings growth when the COVID-19 pandemic struck. The pandemic shuttered most of the company’s academic market and urology centers—accounting for over 30% of total revenues—for months. Management successfully pivoted a portion of the company’s research and development and manufacturing resources to COVID-19 solutions. Despite a very difficult third quarter, during which organic revenues plummeted 8%, Bio-Techne ended the June fiscal year with 4% revenue growth and an increase of 1% in adjusted earnings. In addition to COVID-19 solutions, the company improved performance in Protein Sciences and Diagnostics and Genomics, aided by 24% growth in China. This resilience is a testament to the company’s competitive strengths and its sustainable business model.


At the beginning of the current fiscal year, ending this June 30th, management expressed high expectations that life science research funding will not only recover but increase, given the pressure of planning for future pandemics. Thus, with earning per share gains of 35% and 50% in the September and December 2020 quarters, Bio-Techne’s stock moved sharply higher. During this turbulent period, Bio-Techne launched 283 new proteins, 1,594 new antibodies, and 59 new assays, adding significantly to its Protein Sciences and Diagnostic and Genomics segments product offerings.

Recently, management has been implementing a strategy to accelerate growth by acquiring businesses and product portfolios that leverage and diversify existing product lines, fill portfolio gaps with differentiated high growth businesses, and expand geographic scope. Whether Bio-Techne can keep up with its valuation will be largely determined by management’s success in developing new bio-technology products, testing equipment, and services for the life-science industry. As long-term investors we continually seek to find the optimum balance between risk and reward in the portfolio.


Since January 2016, when the present holding was purchased, Bio-Techne’s stock has gained 360%—equivalent to a compound annual return of 29%! This performance compares to a 14% compound annual return for the S&P 500 during the same five-year period. We purchased the present holding at $81 per share. Relative to 2022’s fiscal year earnings estimate of $7.00 per share, this price represents a very low multiple of earnings, for a P/E of roughly 12-times. Since the stock has appreciated about 500% during the past five years, presently trading at $400 per share, the P/E multiple on next year’s earnings is about 56-times. We are not comfortable with valuations that seem disproportionately elevated and have sold some stock periodically over the past five years, to reduce the holding. As with other long-term holdings with stretched valuations, we periodically apply hedges to Bio-Techne to manage overall portfolio risk.

Bio-Techne remains one of Alpha’s top positions because the shares have appreciated so much over the years. Most of Alpha’s holdings sell at more conservative valuations. We believe Bio-Techne deserves a premium valuation given its competitive advantages, successful history, and outstanding opportunity for future growth. Success stories like these bolster our conviction that life sciences research funding will continue to grow and that Bio-Techne’s revenues will grow substantially in the next five years.   


Martin Marietta Materials (MLM) Headquartered in Raleigh, NC


Martin Marietta Materials is a leading supplier of building materials, including aggregates, asphalt, cement, ready mixed concrete, magnesia, and dolomitic lime. Aggregates are crushed stone, sand, and gravel used in construction and infrastructure build and repair. With more than 100 years of high-quality aggregate reserves, Martin Marietta has a network of operations spanning 27 U.S. states, Canada, and the Bahamas, and owns over 300 quarries, mines, and yards. Alpha invests in Marietta for the crucial role it plays in enabling the solid foundations—of homes, highways, corporate centers, and industrial facilities—that enable the U.S. to thrive. Government infrastructure spending has played an important role for decades, and the proposed $2 trillion infrastructure stimulus package, currently under discussion in Congress, will have a very positive impact, even if total spending ends at 50% of proposed levels.


In February, we attended the company’s investor day. Management made excellent use of the virtual format due to the global pandemic and presented its strategic plan and Strategic Operating Analysis and Review. The lead executive from each regional headquarters in the U.S. provided a discussion of local business. The meetings highlighted the company’s creative flair, unique set of construction materials assets, and safety and profit-focused mindset. Senior management emphasized the company’s pricing power for its products. In many cases, the cost of transporting rock and stone over long distances limits or prohibits competition. Since 2005, the average price per ton for the company’s aggregates has increased at an impressive 4.5% rate from $7.58 to $14.77.  This has occurred during a period of relatively low inflation. In a higher inflationary environment—which is likely in the next five to ten years—Martin Marietta’s pricing power will also be higher.


The company has a disciplined and rigorous business culture, which is critical in the construction industry. Martin Marietta has just achieved its best safety performance in its history—25% better than the world-class safety level for industrial corporations. Chairman, President, and CEO Ward Nye leads the management team and our meetings with him stretch back 15 years. He is a lawyer by training. His critical thinking skills have helped lead a series of successful strategic acquisitions and divestitures that have enabled the company to grow revenues at over 10% annually for the past ten years, while doubling operating profit margins. The stock has doubled since our initial write-up of the company in the fourth quarter of 2018. We continue to see strong long-term opportunity. The day spent with management in February reinforced our views of the business and we expect Martin Marietta to remain a major position during this next year while we await news on the U.S. stimulus package for infrastructure.