Praxair's Stock Is on the Upswing, With More Gains on the Horizon

Wall Street's axiom is to invest in companies that make products everyone needs, and what is more basic than air?

Praxair (PX) produces oxygen as part of its wide-moat product portfolio, which includes atmospheric gases, ceramic and metallic coatings and powders, and process gases such as carbon dioxide and helium. 

The company, which boasts above-average net margins and returns on assets and equity, is a basic materials play, often misunderstood by investors. Praxair shares were about flat in Tuesday trading. 

And yet, those who appreciate the importance of Praxair's sudden surge can detect a deeper undercurrent: a push for manufacturing activity in the U.S. and elsewhere.

The stock has gained about 15% this year, thanks to healthy dividends and stable earnings amid a sluggish economy.

With more than $10 billion in annual sales, Praxair is recognized as one of the most prominent names in its niche industrial gas sector.

The company's rivals include Airgas, Air Products and Chemicals, L'Air Liquide and Linde.

A potential merger with Linde was a possibility for a while this year, until the $60-billion combination was called off.

To be sure, the landscape around Praxair hasn't been positive; slow economic growth has weakened demand in the manufacturing, metals and energy sectors, the core customer segment for industrial gas firms. Also, with over 50% of revenues coming from the other side of the Atlantic, and a growing Asia business, Praxair, is vulnerable to the struggles of global customers, including Procter & Gamble and Pfizer.

Downbeat fourth quarter guidance indicates that the weakness in the American manufacturing space is not yet over.

But despite these challenges, Praxair's numbers have been stable. Results have mostly been in-line or better than consensus estimates, with a strong demand registered in the resilient food, beverage and health care markets.

Still, analysts are penciling in a 5% topline growth for fiscal 2017, accompanied by a robust 8.4% earnings per share (EPS) growth.

Furthermore, after a near flat EPS metric for the past five years, Praxair should achieve 5%-6% growth for the next half decade.

The company delivered an operating cash flow of $800 million in the third quarter, and had an augmented project backlog to $1.4 billion. It has also snapped up key carbon dioxide acquisitions and progressed on a joint venture with GE's GE Aviation. Those were key moves in a dull market.

Praxair's historically high operating margins (now over 21%), controlled capital expenditure plans, and overall business strategy will help the company to offer modest dividends.

At a yield of 2.55% and 11 years of rising payouts, the stock is one of the most dependable payers among peers in the synthetics space like International Flavors & Fragrances and Albemarle.

Praxair has shown a tendency to launch new ideas to keep itself steady, even at a time when the business environment is challenging.

The company will eventually trade at the premium it deserves.

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The author is an independent contributor who at the time of publication owned none of the stocks mentioned.

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