We issued an updated research report on industrial gas producer and supplier, Praxair Inc. PX on Dec 26. Increasing application of industrial gases as well as customers’ preference for the company’s products and services are favoring Praxair. However, exposure to headwinds stemming from rising cost and huge debts, international exposure, industry competition and global uncertainties might prove detrimental.
It currently carries a Zacks Rank #3 (Hold). In June 2017, the company signed a merger agreement with Linde AG to form a new holding company. The all-stock transaction will combine Praxair’s efficient operating model and Linde’s expertise in engineering and technology, creating a leading industrial gas company with a strong international presence, a large customer base and solid financial flexibility.
Praxair’s financial performance was better than expected in three of the last four quarters while was in line in one. The company’s average positive earnings surprise was 2.32%. The stock’s Zacks Consensus Estimate is currently pegged at $5.81 for 2017 and $6.25 for 2018, representing growth of 0.9% and 1% from their respective tallies 60 days ago.
Also, market sentiments have been positive for Praxair with the stock yielding 10.9% return in the last three months. This gain is above 6.6% growth of the industry it belongs to.
Below we briefly discuss the company’s potential growth drivers and possible challenges.
Factors Favoring Praxair
Business Diversification a Boon: Praxair serves customers in various end markets including healthcare and petroleum refining; computer-chip manufacturing and beverage carbonation; fiber-optics and steel making; aerospace, and chemicals and water treatment. Such diversification prevents the company from losses in the event of loss of business from any particular customer.
Furthermore, international diversity has played a major role in Praxair’s profitability over time. The company primarily operates in North America, South America, Europe and Asia.
Solid Contract Wins: Increasing application of industrial gases in manufacturing, transportation, healthcare, food and beverages, and metal fabrication industries is an advantage for Praxair. This positive aspect along with the company’s initiatives for improving its products and services has won it many contracts.
Exiting third-quarter 2017, the company had a solid backlog of $1.5 billion. This clearly reflects customers’ preference for its world-class technology, high-quality products and gas supply services. For instance, in October, Praxair signed long-term agreements with BASF and Samsung to build and operate a new syngas processing plant and an air separation plant, respectively, for them. Also, in the same month, the company secured a long-term gas supply contract from GLOBALFOUNDRIES and Shanghai Huali Microelectronics Corporation.
Shareholders’ Return and Promising 2017 Guidance: Share buybacks and dividend payments are the prime means of returning value to shareholders for Praxair. In the first nine months of 2017, the company paid dividends totaling $675 million and repurchased shares worth $11 million.
The company currently has $81 million authorization left under its 2014-approved share buyback program while full authorization is left of its $1.5 billion program approved in 2015.
For 2017, the company anticipates benefitting from a talented workforce, sound product portfolio and new project wins. It raised its earnings guidance to $5.63-$5.75 from the previous projection of $5.55-$5.80. Earnings are predicted to grow 3-5% year over year. Capital spending is expected to be nearly $1.4 billion.
Factors Working Against Praxair
Rising Costs & Huge Debt Level: Praxair is suffering from the risks of escalated costs and expenses. In the first nine months of 2017, the company’s cost of sales increased 9.4% year over year while selling, general and administrative expenses jumped 2.1%. We believe, if unchecked, rising costs and expenses can hurt the company’s margins in the quarters ahead. Also, a high-debt level can lead to heightened financial obligations, posing serious threats to the company’s financial health. Exiting the third quarter, the company’s long-term debt was approximately $8.2 billion.
Adversaries Emerging From Global Uncertainty: End markets served by Praxair are highly susceptible to volatile global economic conditions. Also, lower level of industrial activities in the countries where the company operates will adversely impact its sales, earnings and cash flow.
For instance, business in North America was adversely impacted by hurricanes. Also, lower inflation impacting prices, political uncertainty and weakness in industrial market impacting merchant and packaged volumes adversely affected operating margin of the South America segment in the third quarter of 2017. We believe that persistence of such weaknesses in any of the end markets served might prove detrimental for the company’s profitability.
Threat From Industry Competition and International Expansion: Praxair faces active competition from other players in the industry. Extensive business rivalry increases the bargaining power of end users and thus, exposes the company to risks of market share loss. Top peer companies include Asahi Kasei Corporation AHKSY, Koppers Holdings Inc. KOP and Kronos Worldwide Inc. KRO. All these stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
In addition, business expansion in foreign nations has exposed Praxair to risks arising from adverse movements in foreign currencies and geo-political issues. In the first nine months of 2017, the company sourced nearly 13.5% from Europe, 13.3% from South America and 15% from Asia.
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