Markets & Finance

A Gas Producer on the Rise


By Richard O'Reilly This week's S&P Focus Stock of the Week is Praxair (PX), which is ranked 5 STARS, Standard & Poor's highest investment ranking.

Praxair is the largest producer of industrial gases in North America and the third largest in the $40 billion global market. Industrial gases include the large volume gases oxygen and nitrogen and smaller volume gases such as argon and hydrogen, as well as specialty gases. Industrial gases account for almost 90% of the company's sales, with about 60% in North America, 14% in South America, and 10% in Europe. The company also has a small division with 12% of annual sales that provides high performance coatings for aircraft engines, electronics, printing and other industries.

PRICE HIKES. Standard & Poor's anticipates Praxair's total sales this year to rise by 5% to 7%, paced by modest gain in gases volume despite the impact of slow global economic growth, and unfavorable currency exchange rates. We expect nearly a double-digit increase in selling prices, partly as a result of efforts to recover higher energy costs in addition to contractual pass-through of natural gas prices, but also due to real increases in prices. The industry is seeing a better price environment than in many years due to an increased focus on return on capital resulting in improved capital spending discipline and tighter capacity conditions.

Although operating margins may narrow slightly this year due to higher energy costs S&P expects Praxair to post a 7% increase in earnings per share to $3.15 from $2.98 of 2000, a bit more conservative that the company's stated 10% annual EPS goal. However, this gain is much better than for our overall industry group. For 2002, we anticipate an 11% rise in EPS, to $3.50 a share assuming better economic conditions.

GROWTH FOCUS. Under a new CEO appointed in early 2000, the company is focusing on five global markets with above average growth (15%) rates- metals technologies, food and beverage, healthcare, surface technologies and semiconductors materials. For example, the company's CoJet system provides cost and energy savings to steel mills. First introduced to electric arch furnace mills, Praxair has expanded it to basic oxygen furnaces. The company estimates costs savings up to $5 per ton of steel. Licensing fee income could be sizable.

The shares, at a current quote of $50, trade at a modest 16 times estimated 2001 EPS, which represents a slightly greater than historical discount to its peer Air Products & Chemicals (APD) (19X). Our 12-month price target of $60 is based on our expectation of a combination of rising EPS with that of a narrowing in the valuation discount to that of Air Products.

Cash dividends have increased regularly since Praxair was spun off from Union Carbide in 1992, and have risen by more than 50% since 1997. Nevertheless, the current dividend payout ratio remains below 35% of expected 2001 EPS, suggesting future increases are likely. O'Reilly is a chemical industry analyst for Standard & Poor's


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