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Praxair- More Than Just Hot Air

Posted on: July 29, 2008 - Email Article - Printable Version

Darrell Reid

About the Author:

Praxair Inc. [PX: 63.87, +1.44 (+2.31%)] earnings exceeded expectations last week, posting double-digit growth in EPS and revenue in all segments, which demonstrates the resilience of their core business. Praxair, one of the world’s largest industrial gas companies reported diluted EPS of $1.08, a 21% increase from the same quarter last year beating Street expectations of $1.06 per share.

What do they do?

Praxair Inc. is the largest industrial gases supplier in North America and South America, supplying atmospheric gases, process gases, and specialty gases along with high performance coating and related services to a multitude of end markets. Praxair’s products are offered in three methods- onsite tonnage, merchant liquids, and packaged gases. Onsite tonnage has the largest volumes in the form of plants built adjacent to the customer’s facility with 10-20 year contracts set in place. Merchant liquids are delivered in smaller volumes by tanker trucks to storage containers. Packaged gases are supplied in cylinders that are sold independently through retail stores. Praxair serves over 25 different end markets in various regions- over 50% of their revenues are outside the U.S. Praxair’s strength lies within its revenue diversification and its ability to secure profits by implementing cost-escalation clauses written into their customer contracts that allow Praxair to raise gas prices as needed. The end markets driving Praxair’s success are manufacturing, and energy while Praxair’s strongest regions are North America and South America.

Valuation

Forward P/E: 19.19x
Price/ Book: 5.31x
PEG: 1.65
Debt/Equity: 0.8
ROE (TTM): 24.28%
Sales Growth Rate (5 Years): 12.89%

How did they do?

Praxair runs a tight ship and has posted positive returns and growth rates for Q2 2008. Praxair reported EPS growth of 21% and sales growth of 23% compared to the same quarter last year. Praxair reported income of $349 million versus $291 million last year along with $380 million in capital expenditures attributed to onsite construction. Praxair’s return on equity and return on capital were 25.7% and 15.4% respectively. Praxair showed strength amongst all its segments benefiting from higher volumes, higher prices and a weak dollar.

North America: Sales were up 22% and profit was up 19% YoY. Strength in chemicals, metals, and manufacturing companies made up for the weakness in automotive and transportation segments. Mexico in particular had sales growth of 21% due to investments in the energy sector

Europe: Sales were up 21% and profit was up 25%, with increased volumes in merchant & packaged gases in Germany and Italy due to the strength in petrochemical companies and refiners. Oil refiners are switching to diesel to preserve higher margins- diesel refining uses more hydrogen.

South America: Sales were up 31% and operating profit was up 34% as growth in energy, manufacturing and metals contributed to higher volumes. Currency trends contributed over half of the sales growth in the second quarter 2008.

Asia: Sales were up 30% and operating profit was up 33%, as demand for specialty gases was driven by chemicals, manufacturing and metals markets. The electronics market had the greatest effect on success in Asia as sales grew 37% YoY. Demand for specialty gases has risen recently, as the photovoltaic markets expand in response to a growing need for solar panels.

Surface Technologies: Sales were up 17% as the demand for performance coatings steadily grew from the aerospace industry and energy markets.

So what happens now?

Praxair has performed well in an international economy that has taken a toll on its competitors. Their closest competitor Air Products & Chemicals [APD: 55.35, +2.29 (+4.32%)] suffered an impairment charge on their Q3 2008 earnings due to the sale of a struggling U.S healthcare segment. Praxair reported expected sales growth of 16%-20% and earnings growth of 16%-19% for the fiscal year 2008. These numbers will be driven by the sustained strength of energy, electronics, metals and manufacturing sectors in South America and Asia- Asian backlogs continue to trend higher.

From and administrative standpoint, Praxair announced a new 1 billion share repurchase program in addition to the one previously announced in July of 2007. This new share repurchase program will take place over the next two years. Also, Praxair announced a dividend of $0.375 payable in September. Looking further into the future, Praxair has established itself as a leader in the development of clean coal technology and carbon sequestration.

Praxair announced their third clean coal project, this one with Vattenfall AB of Sweden, to supply 8,000 tons of oxygen per day. Praxair currently holds 200 patents over their unique “oxy coal technology”. They have positioned themselves to weather the international and domestic economy better than competitors and are now placed at the forefront in the development of new green house gas reduction technology. There will be more to come as Praxair continues to benefit from a broad revenue structure and strong segments growth from all end markets. This is definitely a company to keep on your radar.

-Darrell Reid

Disclaimer: The author is long of PX; The mutual fund the author is associated with is long of PX.

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