Praxair (PX) - Stock Analysis

Introduction:

Praxair is among the largest industrial gas supplier companies in the world. As of early 2010, its market share stood at an impressive 15% as indicated by the following pie chart (taken from Praxair’s corporate presentation document):


Their products are classified as:
  • Atmospheric gases – extracted directly from air, and
  • Process gases – produced through other processes.
Markets served include segments as aerospace, chemicals, electronics, energy, food and beverage, health care, manufacturing, metals, and a variety of smaller markets. Below is a pie chart showing the diverse nature of the company’s revenue streams (also taken from Praxair’s corporate presentation document):



The company has a very mature patent program with over 3000 approved and active patents. As indicated by the following achievements, they are industry pioneers:
  • Pioneered the first commercial oxygen plant in the 1920s.
  • Pioneered non-cryogenic air separation in the early 1950s.
  • Introduced the patented CoJet technology in 1997, a revolutionary means of injecting oxygen and other gases into electric arc furnaces (EAF). The process has since become a standard for chemical energy input in EAFs.
  • Commercialized oxygen-based technologies for utility boilers and steel mills in the early 2000s
  • Pioneered Brazil’s first LNG plant
The screen-shot below indicates the healthy diversification of the company in terms of both distribution and sales by region:



The dark shadow plaguing the company is its history before 1992. Praxair was spun-off from Union Carbide, the company partially responsible for the 1984 Bhopal tragedy, considered the world’s worst industrial catastrophe.

Business Issues:
The company plans to achieve annual organic sales growth of 8-12% and generate 12-18% annual organic EPS growth. Of this, base business is expected to follow industrial production and achieve growth of 3-4%, applications and technology transfer to contribute 2-3%, and on-site project backlog at 3-5%. Among these, the on-site project backlog has the best visibility while the other two with their included dependencies imply associated risks. Overall, the 12-18% long-term EPS growth projection seems overly aggressive; given EPS growth was just achieved last year from cost-cutting measures.

Praxair has significant debt. Good cash flow well above what is needed to service their debt obligations is generated. The debt-to-equity ratio stands at 0.85, which is not excessively high compared to peers. Nevertheless, it entails trouble should business unexpectedly slack off for the company.

Praxair is a dominant player in Brazil and the hope is to achieve comparable levels of penetration in other emerging markets. This strategy is critical for maintaining growth, as mature markets are expected to grow modestly in the 2% range. As a commodity business, the company however runs the risk of push-back from emerging market governments as they encourage local competition – amply demonstrated by the whopping $1.3B fine Brazilian regulators slapped on White Martins, their Brazilian subsidiary. That said, the risk is indeed worth taking for growth potential is enormous and the opportunity long-term as demonstrated by the bar graph below:



Praxair is largely invulnerable to economic uncertainties as their on-site/pipeline business, accounting for a quarter of the overall revenue, has 15-year take-or-pay contracts. A limited level of immunity is available for the merchant liquid (29% of revenue) business as exclusive supply contracts are predominant. Also, Praxair is expected to benefit from certain global shifts with regards to emerging market developments, energy sourcing environmental protection:
  • Infrastructure development and domestic consumption increases in the emerging economies.
  • Shift to hydrogen as an energy source.
  • Enhanced oil recovery initiatives that use Praxair’s products as a raw material for injection technologies.
  • Coal gasification initiatives to derive chemicals out of coal require Praxair’s products.
  • Alternative bio-fuels are resource-intensive compared to the use of gases Praxair produces.
These initiatives are expected to act as growth drivers to support their annual sales growth target of 8-12%.

Finances:
Below is a table summarizing Praxair’s financial position:



Year200720082009
Revenue9.40B10.80B8.96B
Net Earnings1.18B1.21B1.25B
Shares Outstanding315.49M306.86M306.48M
Earnings per Share (Normalized – one-time items removed)3.623.804.01
YOY Earnings Growth20.67%4.97%5.53%
YOY Revenue Growth12.95%14.83%(17.04%)
Net Profit Margin12.55%11.20%13.95%


Last year business dipped substantially in the wake of the global recession - Revenue fell 17% yoy but amazingly the company coped to grow earnings as the net profit margin improved yoy by an outstanding 275 basis points – the impact of a one-time tax event buoyed the effort. Still, this is incredible execution by its executive management team.

Quantitative Rating:

Below is a spreadsheet showing our quantitative rating summary of Praxair (PX). (click for an understanding of the ratings on this spreadsheet):


PX scores 7.25/10 on its ability to beat inflation: Return on Equity, Net Profit Margin, Free Cash Flow are all almost perfect. PEG ratio, a measure of valuation is however very rich at 1.86.

Corporate Abuse rating is 0/10 as their executive compensation is egregious: The CEO makes around $8M, over 250 times the average worker.

Income generation and liquidity measure is almost perfect at 9/10: PX pays a decent 2% dividend. The stock is also Optionable and very liquid.

Volatility ranking is also almost perfect at 9.33/10: the company has sizable debt and that reduced this rating slightly.

Capacity to increase dividends scored 10: the company grew earnings steadily in the last 5 years and earnings showed consistent growth history as well. Praxair’s payout ratio is very good at 39 – company has room to increase dividends. The company has very good 5-year average dividend growth at an annualized rate of 17.31%. Earnings also showed a consistent growth rate of 12.75% in the last 5 years.

The overall quantitative rating or the ‘OFB Factor’ came in at 7.12/10, which is well above average.

Summary:

Praxair Inc. has an enterprise value of $33.69B and a forward PE of 17.38. Praxair’s revenue came down significantly in the last year as the company felt the impact of the recessionary environment worldwide. Praxair is expected to grow revenue in the high single-digit range for the next two years, hinging on economic rebound. Praxair’s sales projections incorporate achieving a CAGR of 14% in the emerging market while continuing modest growth in other markets thereby increasing sales in emerging markets from the current 35% range to 45% in the next 5 years. In many of these markets Praxair’s advantage is being the first-mover and with it the chance of succeeding is high although associated risks abound.

Praxair has a PEG ratio of 1.86, which indicates valuation is high. Our quantitative analysis showed the company as having a ‘Well Above Average’ rating. Although most of our other checks showed green lights, valuation is high and we recommend adding Praxair to the watch list and consider purchase when the share price gets cheaper.



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