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Frank Sands' Gas Long-Term Pick

April 22, 2014 | About:

When reviewing stocks from the gas industry, the principal risk is always the same: price volatility. Praxair (PX) is one company that has been able to avoid the risk and improve overall performance since its entrance to the stock market. Only the 2007 economic crisis was able to shake the solid foundations on top of which the company’s business model rests. Nonetheless, market performance has ever since been on the uptrend. There are several reasons for the positive results. Most importantly, the profits conquered were shared with stock holders through annual dividend increments. One of the beneficiaries has been Frank Sands (Trades, Portfolio), who increased the size of his holding since early 2011 was the largest shareholder before selling out, making a strong statement for long-term investment in the company.

Commenting on Success

Praxair reported for fiscal year 2014 sales of $11.9 billion, up 6% from 2012, and adjusted earnings per share of $5.93, up 6% year-over-year. The resulting dividend increment represented the 21st consecutive annual raise, while at the same time management approved a new share repurchase program authorized for $1.5 billion. Total sales volume for the fourth quarter of 2013 reached $3.01 billion, or a 10% above the prior-year quarter excluding currency translation effects. Most importantly, the company completed three world-scale hydrogen plants, increasing global hydrogen capacity by 40% to 1.4 billion scfd.

The latest asset opening for Praxair announced referred to the start-up of a new 270 tons per day air separation plant in Pisco, Peru. Added capacity will serve Aceros Arequipa, Peru’s largest long steel maker, through a long-term contract to help meet the company’s expanding steel production capacity. Additional capacity is the result of a new steam methane reformer at the Niagara Falls facility. The project will serve customer needs for hydrogen in the Northeast and Midwest regions of the U.S. and southeastern Canada.

Clients have also highlighted Praxair’s high operating standards. The last award received by the company recognized the company with the 2013 Best Quality Supplier Award. Recognition also entitled the firm new contracts. Shanghai SECCO Petrochemical (SHI), for example, selected the Praxair to supply large volumes of pure oxygen for a sulfuric acid regeneration unit. Acquisitions have also been part of the latest news and material growth. The company acquired Messer Italia S.p.A, Lake Welding Supply Company, United Welding Supplies and Best Welders Supply.

Following on Success

Besides Frank Sands (Trades, Portfolio), Pioneer Investments (Trades, Portfolio), PRIMECAP Management (Trades, Portfolio) and RS Investment Management (Trades, Portfolio) have shown a strong will for long-term investment as well. Their positions date back to 2009 and have been rewarded along the way. However, there is noticeable tendency to drop the stock as stock price widens the gap with the Peter Lynch earnings line. Additionally, the stock trades at 22.5 times its trailing earnings, carrying a 33% premium to the industry average. At the same time, quarterly dividend and annual yield are not sufficiently high to compensate for a high stock face value.

The upsides to Praxair are, first, expanding of operating regions and addition of new customers to existing sphere of businesses. Second, it provides a competitive advantage to clients by continuously developing new products and applications as well as through innovative production techniques and distribution of industrial gases. Third, a backlog that comprises 32 projects worth $2.2 billion that will guarantee a strong cash flow in the long-term. Fourth, the company is a market leader in North America and a dominant competitor in South America. Fifth, steel mills continue to replace coal for gas a process that requires higher oxygen quantities.

In the end, Praxair is a good stock for a prospective long-term investment. Nonetheless, face value is high, small returns are offered, debt levels continue to climb, and revenue growth is below the industry average, amid a wide operating margin. Hence, it is not recommended no take a strong position in the company until debt levels are reduced.

Disclosure: Vanina Egea holds no position in any of the mentioned companies.

About the author:

Vanina Egea
A fundamental analyst at Lone Tree Analytics

Visit Vanina Egea's Website


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