Markets & Finance

Industrial Gases: A Rising Sector


By Sam Stovall The back-to-basics trend continues in this week's Relative Strength rankings. The industries on the list come mainly from the economically sensitive Standard & Poor's sectors: Consumer Discretionary, Industrials, and Materials. Hopes for a rebound in the U.S. economy have sparked buying interest in stocks from these groups.

One of the industries recently piped into the rankings is Industrial Gases, which is followed analytically by S&P's Richard O'Reilly. With investors placing their bets on a recovery in manufacturing, it wouldn't be surprising to see these stocks benefit.

Industrial gases are used in a wide range of manufacturing activities, including metals and metal fabrication, chemicals processing, petroleum refining, electronics, food and beverage, and health care. And O'Reilly has a "slightly positive" investment outlook for the group.

The S&P Industrial Gases Index has performed well since the mid-September market low, despite disappointing earnings forecasts for the two industrial-gas makers in the index, Praxair (PX) and Air Products & Chemicals (APD), the third- and fourth-largest global players in the industry, respectively. Airgas (AGC), the largest U.S. distributor of packaged gases, is the index' third member.

$40 BILLION MARKET. Other major participants in the U.S. market include Air Liquide America (a unit of France's L'Air Liquide) and Britain's BOC Group. (S&P doesn't follow either one analytically.) These companies, along with a large number of independents, also compete with Airgas in the packaged-gas market.

O'Reilly notes that the worldwide market for industrial gases -- which include nitrogen, oxygen, argon, hydrogen, acetylene, and carbon dioxide, among other names familiar to those who stayed awake in chemistry class -- is about $40 billion a year. The U.S. alone accounts for $13 billion of that. Historically, consumption of industrial gases has grown at 1.5 to 2 times that of industrial production growth.

O'Reilly's top pick in the index is Praxair, which carries a 4 STARS (accumulate) ranking from S&P. He notes that it has been able to deliver earnings growth despite shrinking revenues, mainly through cost cutting. He's neutral on Air Products and Airgas, each of which are ranked 3 STARS (hold).

S&P Relative Strength Rankings

These industries carry six-month relative strength rankings of "5" as of Jan. 25, 2002 -- meaning that they're in the top 10% of the 115 industries in the S&P Super 1500 (the combined S&P 500, S&P MidCap 400, and S&P SmallCap 600) based on prior six-month price performance.

Industry/Sector

Largest Company (Market Cap.)

S&P STARS* Rank

Air Freight & Couriers/Industrials

FedEx (FDX)

5 STARS

Casinos & Gaming/Consumer Discretionary

Park Place Entertainment (PPE)

5 STARS

Catalog Retail/Consumer Discretionary

Lands' End (LE)

3 STARS

Consumer Electronics/Consumer Discretionary

Harman International (HAR)

Not Ranked

Fertilizers & Agricultural Chemicals/Materials

IMC Global (IGL)

5 STARS

Footwear/Consumer Discretionary

Reebok (RBK)

4 STARS

Homebuilding/Consumer Discretionary

KB Homes (KBH)

4 STARS

Industrial Gases/Materials

Praxair Inc. (PX)

4 STARS

Metal & Glass Containers/Materials

Pactiv Corp.(PTV)

5 STARS

Office Electronics/Information Tech.

Xerox (XRX)

3 STARS

Water Utilities/Utilities

Amer. Water Works (AWK)

3 STARS

* S&P's ranking system for the appreciation potential of stocks over a 6- to 12-month period: 5 STARS (buy), 4 STARS (accumulate), 3 STARS (hold), 2 STARS (avoid), 1 STAR (sell). Stovall is senior sector strategist for Standard & Poor's


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