Praxair Gains From Contract Wins, Solid Demand, Risks Remain

We issued an updated research report on industrial gas producer and supplier, Praxair Inc. (NYSE:PX) on Sep 26, 2017. This chemical stock is poised to benefit from solid long-term growth opportunities. The company’s earnings are projected to rise 11.5% in the next three to five years.

In the first half of 2017, the company’s shares have yielded 14.5% return. In June, it signed a merger agreement with Linde AG (DE:LING) 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.

However, exposure to headwinds might restrict Praxair’s growth momentum in the near term. Below we briefly discuss the company’s potential growth drivers and possible headwinds.

Growth Drivers

Solid Demand and Contract Wins: We believe that increasing application of industrial gases in manufacturing, transportation, healthcare, food and beverages, and metal fabrication industries comes as a boon for Praxair. To leverage benefits from this, the company has constantly undertaken initiatives for developing new products and improving its gases distribution capabilities.

Exiting second-quarter 2017, the company had a solid backlog of $1.4 billion, clearly reflecting customers’ preference for its world-class technology, high-quality products and gas supply services. Notably, in April, the company started operating a new air separation unit at its Burns Harbor pipeline system while in July, it started multiple air separation plants.

Benefits From Diversified Business Structure: We believe Praxair is poised to benefit from its diversified customer base in the healthcare and petroleum refining; computer-chip manufacturing and beverage carbonation; fiber-optics and steel making; aerospace, and chemicals and water treatment. In addition to providing atmospheric and process gases, the company also designs, engineers and builds equipment that produces industrial gases for internal use and external sale.

Furthermore, international diversity has played a major role in building Praxair’s profitability over time. Notably, in second-quarter 2017, it derived nearly 53% of net revenues from its North American operations while roughly 14% were sourced from Europe, 15% from Asia and 13% from South America.

Shareholders’ Return and Promising 2017 Guidance: Share buybacks and dividend payments are the prime means of returning value to shareholders for Praxair. In the second quarter, the company paid dividends totaling $225 million.

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.

Headwinds Posing Threat to Praxair’s Prospects

Relation to Global Uncertainties: Difficult macro conditions might adversely impact activities in Praxair’s end markets as well as economic developments of countries where it serves. For instance, reduction in industrial volume, lower inflation impacting prices and lower merchant and packaged volumes affected operating margin of the South America segment in the second quarter of 2017. We believe that any persistent weakness in any of the end-markets served will adversely impact the company’s sales and profitability, going forward.

For 2017, Praxair believes that customer demand in the United States will be below expectations while economic conditions in the South America will continue to suffer from political tensions. Moderate growth is anticipated in Asia while Europe will likely remain stable.

Diversification Woes and Stiff Competition: We believe that Praxair’s geographical expansion has exposed it to risks arising from foreign currency movements and geopolitical issues. Also, import and export controls, and other economic, political and regulatory policies implemented by local governments might restrict the company’s growth opportunities in foreign nations. In addition, the company faces stiff competition from other players in the industrial gas market. Some major players in the industry are Innophos Holdings, Inc. (NASDAQ:IPHS) , Koppers Holdings Inc. (NYSE:KOP) and Kronos Worldwide Inc. (NYSE:KRO) .

Rising Debt Levels and Others: Praxair faces risks from high-debt levels. Exiting second-quarter 2017, the company had long-term debt of approximately $8.2 billion while its debt-to-capital ratio was 58.5%. We believe, if unchecked, higher debt levels might increase the company’s financial obligations and hence, prove detrimental to its profitability.

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