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Industrial Gases: 3 Stocks To Consider
May 29, 2014 | About: APD -0.21% ARG -0.29% PX -0.2%
When the usually staid industrial gas sector gained the spotlight
recently, thanks to hedge fund manager Bill Ackman's announcement
of a large stake in a major player, two questions came to mind. Did
the industry really deserve the extra attention it was getting, and more
importantly, were there any good stock buys hidden in industrial gas? I
decided to check it out. Here's some of what I found:
Industry Attributes
Industrial gas companies typically produce atmospheric gases and
then distribute them for industrial use. Using air as a raw material,
they produce gases like oxygen and nitrogen through separation processes. Other gases
like carbon dioxide, hydrogen and helium are also offered. Large volume customers usually
get supplied by on-site manufacturing plants. Customers with less gas needs can get
merchant deliveries by tanker trucks to storage containers or in smaller cylinders under
medium to high pressure.
The industrial gas sector is fairly low growth, mainly because it is highly reliant on
economically sensitive customers such as chemical companies and the metallurgical
industry. The good news is that, other than in deep economic downturns, the sector is a
fairly strong income generator. Since they offer a necessary product, without a lot of
competition, on a fairly stringent long-term contract basis, they are usually able to maintain
good profit margins of between 10% and 17%.
Though capital intensive, with typically 70% to 90% of operating cash reinvested back into
plant and equipment, industrial gas companies have put their free cash to good use. Most
have been able to build up their businesses incrementally through a combination of
acquisition, share buybacks and prudent leverage.
All in all, the industry looks like a very solid investment consideration with surprisingly stable
profitability and slow but steady growth. While one probably can't go too far wrong buying
Vinay Singh
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into the sector at reasonable prices, the stocks look really appealing if able to be bought
"on sale." Are there any sales in the sector currently?
Some of the Industry's Major Players
Whether due to a generally strong stock market or recent activist attention, there don't
appear to be any bargains in industrial gas stocks at the moment.
Praxair Inc. (PX), the largest industrial gas company in North and South America with
sales around $11 billion in 2012, reported net income of $445 million, up 4% from the prior
year in its last quarter. Sales rose 7% to $3.1 billion, helped by strong volumes in Asia and
South America with acquisitions contributing about 3% of growth. Revenues in North
America, its largest region with 51% of total sales, came in at around $1.6 billion, up 11%
from the prior year. Acquisitions and increased pricing contributed most of that gain with
volumes flat.
Praxair's share price currently seem a bit rich. Using a cash earnings times a capitalization
multiplier valuation, fair business value looks around $112 a share at a 16 times multiple,
slightly higher than its mid-2000s historical multiple average of 15 times. The calculation is
based on revenues of around $12.1 billion, cash earnings of $2.08 billion, and a cash profit
margin of around 17.2%.
Air Products & Chemicals (APD), with fiscal 2012 sales of around $10 billion, received a
lot of attention lately when Bill Ackman (Trades, Portfolio) revealed a 9.8% stake in the
company. In its most recent period, Air Products reported adjusted net income of $288
million, down 5% from last years comparable quarter. Revenues of $2.5 billion increased
9% versus the prior year. Underlying sales were down 2% due to a business divestiture but
acquisitions contributed 6% and higher energy cost pass-throughs boosted sales 5%. Its
largest business segment, merchant gas with 41% of total sales, had revenue of $1.03
billion, an increase of 18% versus the prior year on stronger volumes and a major
acquisition. On-site gas segment sales of $846 million increased 10% versus the prior
year on higher energy pass-throughs.
Air Products shares look fairly priced with a reasonable business value around $108 a
share. Figuring revenues around $10.3 billion, average cash earnings of $1.4 billion at a
roughly 13.6% margin, and a slightly higher than historical 16 times multiple, there might be
some upside if the recent activist attention can help improve results.
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Comments
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Airgas Inc. (ARG) is a smaller player in the industry with around $5 billion in annual sales.
The company had tepid results in its latest quarter. Earnings per diluted share were $1.14,
up 1% over prior-year adjusted figures and sales of $1.28 billion increased a slight 2%.
Organic sales in the quarter were flat and acquisitions contributed most of the sales growth.
The company held sluggish business conditions and the negative impact from a recent
Environmental Protection Agency ruling on refrigerant production allowances as major
reasons for the moderate showing.
Offsetting the negatives was some benefit from the companys near completion of a SAP
enterprise information system multi-year rollout. Airgas is expecting some significant
economic benefits from its implementation. They believe the system will yield at least $75
million in annual run-rate operating income additions by the end of 2013.
Airgas shares currently look optimistically priced. This could be due to recent increased
interest in the sector, expected industry consolidation, or anticipated bottom line
improvements. But fair value calculates to around $98 a share at a slightly elevated 14
times multiple with estimated sales of $5.2 billion and average cash earnings of $520
million at a 10.0% profit margin.
Conclusion
The industrial gas industry looks like an attractive, relatively stable, sector. The companies
are generally well run and nicely profitable. Industrial gas stocks, though not on sale
currently, look like they might want to be a serious investment consideration whenever
offered at a noticeable discount to fair value.
Rating: 0.0/5 (0 votes)
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