Praxair: Long-term Growth Story That Is Still Cheap

Praxair Investment Highlights

• Excellent sector diversification means Praxair can withstand weakness in any one or two segments while still generating good cash flow
• Management is committed to shareholder cash return through dividends and repurchases
• The company is highly leveraged with almost two-thirds the capital structure in debt but still carries a good debt rating and sufficient liquidity

Praxair (NYSE: PX) is one of the world’s largest suppliers of gases used for industrial purposes and the largest in North America and South America. Industrial gases are used in nearly every sector and the company has built a real advantage in its diversification across customer.


The plunge in energy and mining has hit Praxair with 30% of sales from the two sectors but stronger gains are being booked in manufacturing and healthcare. The company’s business in Latin America has also been hit with the slowdown in the region but should still pay off over the long-term.

The company has been building a strong competitive advantage in emerging markets, most notably in South America, over the last few years. The recent drop in currencies and economic growth has hit shares but I still see good long-term potential from growth. Industrial gases usually account for a small portion of costs for buyers so they don’t switch providers much and contracts typically run for decades.

I like that Praxair is taking advantage of weakness in some markets to keep growing. The company recently announced the acquisition of the remaining stake from Europe’s Yara in a joint venture for the region’s CO2 business, valued at $350 million. The company also recently acquired Tecnogas, a 50-year old supplier in Peru with annual revenue of $10 million. Both acquisitions are being made when regional prices are fairly low but long-term upside should validate the deals.

Praxair Stock Fundamentals

Sales have been hit over the last few quarters as almost the entire commodities sector suffers from lower prices. Praxair is a key supplier to energy and metals mining, providing gases used in drilling injection and refinery operations. Operating income has fallen slightly faster because some costs, mostly administration, are more fixed than others.

Operating costs should start coming down on the company’s restructuring that will trim staff by 5% and cut expenses by an estimated $75 million starting in the fourth quarter. Revenue has been hit by weaker foreign currencies as well, especially in emerging markets.

Praxair is more heavily leveraged than other competitors. The company carries more than $9.2 billion of debt on its balance sheet for nearly two-thirds its capital structure. This shouldn’t be a problem though and Praxair just recently received an A-rating for $750 million in debt.

Against the weaker sales environment, Praxair has been able to protect cash flow by cutting capital expenditures slightly. The company still spends more than $1.6 billion a year in capital investment but has managed to stabilize free cash flow.

Praxair Dividend and Growth

Despite the weak environment for shares, Praxair has maintained its dividend growth. The shares pay a 2.8% yield above the 2.2% average over the last five years. The dividend payout ratio has increased to 54% against a five-year average of 44% so some slowdown in dividend growth could be expected if industry fundamentals don’t turn around.

Praxair has grown the dividend in-line with earnings at a compound rate of 19% over the last 22 years and management intends to keep the pace going. Capital expenditures have been cut to protect cash flow and keep returning cash to investors.

Praxair has always been an aggressive buyer of its own shares and has stepped up its repurchase program over the last year. The company repurchased $862 million in shares in the last fiscal