February 16, 2011 / 12:40 AM / 8 years ago

Analysis: Praxair steadily grows as rivals bicker in court

NEW YORK (Reuters) - As its smaller rivals bicker in court, Praxair Inc PX.N has focused on growing its earnings and overseas relationships to remain the largest North American-based industrial gas supplier.

More than a year ago the company was mentioned as a possible friendly buyer for Airgas Inc ARG.N, which is trying to fend off a $5.9 billion hostile bid from Air Products and Chemicals Inc (APD.N).

Airgas and Air Products are now embroiled in a court case that will decide whether the Airgas board can use a controversial poison pill defense to sharply increase its share count at a discount.

Instead of diving into the merger mess, Praxair boosted its dividend and increased its project backlog in the industrial gas sector, which supplies oxygen, helium and other gases used in hospitals, construction sites and toy balloons.

Praxair’s fourth-quarter earnings beat Wall Street’s expectations, and the company’s stock has jumped 26 percent in the past 52 weeks.

“Right now we’re recommending Praxair. They’ve always been the gold standard in industrial gases,” Deutsche Bank analyst David Begleiter said. “They’ve shown a very consistent earnings profile.”

HISTORY OF GROWTH

Founded in 1907, Praxair embraced the concept of on-site gas supply after World War Two. The company, which was spun off from Union Carbide in 1992, signs long-term supply contracts to build an industrial gas plant at a customer’s site, guaranteeing a steady revenue base.

The concept is standard practice for the “big four” of the global industrial gas sector: Praxair, Air Products, France’s Air Liquide (AIRP.PA) and Germany’s Linde AG (LING.DE).

Air Products, for instance, has an on-site facility that supplies hydrogen and oxygen for NASA’s space missions.

Yet unlike Air Products, Praxair competes in the three main industrial gas spheres: on-site, merchant and packaged gas supply.

Merchant gases are shipped by trucks that can be seen on highways across North America. Packaged gases are sold via canisters; most consumers know them as large tanks used to fill helium balloons.

Air Products, which has strong on-site and merchant units, sold its U.S. packaged gas business to Airgas in 2002. It now wants to reenter the packaged space by buying Airgas and eclipsing Praxair as the North American industrial gas leader.

But that deal could complicate things for Air Products as it tries to digest the acquisition.

“I don’t think (an Airgas buyout) will strengthen Air Products,” said Soleil Securities analyst Mark Gulley. “Their competitors are salivating at the prospects of this deal going through because they think it’s going to cause some disruption” to Air Products’ operations.

PRAXAIR SHARE POTENTIAL

Since January 2010, just before Air Products’ bid went public, Praxair’s stock has outperformed both the S&P 500 and Air Products. Shares of Airgas have outperformed both companies and the index, propped up by the offer.

Some on Wall Street see Praxair’s stock as overvalued, though. StarMine SmartEstimates, which puts emphasis on recent forecasts by top-rated analysts, views the company with an intrinsic value of $95.78, below Tuesday’s closing price of $96.86.

And while Praxair recently boosted its dividend by 11 percent, its dividend yield of 2.07 percent is still below Air Products’ 2.18 percent.

Both Deutsche Bank’s Begleiter and Soleil’s Gulley still rate the stock as a “buy,” citing the company’s forecast for low-single-digit earnings growth in the next few years.

Soleil’s Gulley has a price target of $120, well above the current price.

“There’s no Hail Mary passes,” said Soleil’s Gulley. “There’s no bold initiatives. You don’t wake up one day and find a new paradigm. Praxair just grinds it out. It’s all about execution.”

Reporting by Ernest Scheyder

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