After Several Acquisitions, Airgas Expanded its Geographic Reach

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Nov 06, 2014

In this article, let's take a look at Airgas Inc. (ARG, Financial), a $8.31 billion market cap company that is a leading distributor of industrial, medical and specialty gases and related equipment also distributes safety and other disposable supplies through its network of stores.

Several acquisitions

Since 1986, the firm acquired 450 businesses, and this way it becomes the largest U.S. distributor of packaged gases and welding, safety and related products, dominating an industry valued at $13 billion and having a market share of about 25%. We think the acquisition strategy will continue in the future, contributing with a strong local presence.

The Linde acquisition involved expanding the geographic reach as well as branches, warehouses and packaged gas fill plants. With the deal it has increased its internal industrial gas supply to 30%.

Differentiation

Its multiple distribution channels as well as the effort to customize needs of customers to differentiate the company with respect to its competitors. Airgas focuses on providing a customer-focused sale. Moreover, the company expects to expand operating income with the implementation of the SAP software that should improve revenue management.

Some risks

First, the firm is exposed to the industrial manufacturing and construction sectors, which means that a great downturn on those markets, will affect company´s revenues. Secondly, we can see a slight risk when Airgas needs to renegotiate new deals once the current contracts end.

Revenues, margins and profitability

Looking at profitability, revenue grew by 5.91% led earnings per share increased in the most recent quarter compared to the same quarter a year ago ($1.30 vs $1.27). During the past fiscal year, the company increased its bottom line. It earned $4.68 versus $4.36 in the previous year. This year, Wall Street expects an improvement in earnings ($5.05 versus $4.68).

The gross profit margin is quite good at 49.8%, and the net profit margin of 7.24% is similar to the industry average.

Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

Ticker Company ROE (%)
ARG Airgas Inc 19.37
ASH Ashland Inc 12.71
PX Praxair Inc 28.37
CBT Cabot Corp 10.03
 Industry Median 7.63

The company has a current ROE of 19.37% which is higher than the one exhibit by Ashland (ASH, Financial) and Cabot (CBT, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, Praxair (PX, Financial) could be the option. It is very important to understand this metric before investing, and it is important to look at the trend in ROE over time.

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Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of 23.6x, trading at a premium compared to an average of 23.2x for the industry. To use another metric, its price-to-book ratio of 4.3x indicates a premium versus the industry average of 1.77x while the price-to-sales ratio of 1.64x is above the industry average of 1.03x.

As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10.000 five years ago, today you could have $24.325, which represents a 19.5% compound annual growth rate (CAGR).

03May20171307521493834872.png

Final comment

As outlined in the article, Airgas expanded the business to more customers with a major geographic reach. Apart from acquisitions, the firm can achieve growth via opportunities in strategic products (safety products, bulk gases, specialty or medical gases, carbon dioxide, and dry ice).

Hedge fund gurus like Paul Tudor Jones (Trades, Portfolio), Jim Simons (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio) added this stock to their portfolios in the second quarter of 2014, as well as Columbia Wanger (Trades, Portfolio).

Disclosure: Omar Venerio holds no position in any stocks mentioned