Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Praxair, Inc. (PX): Recurring Revenue and Pricing Power Make This Stock a Buy

Page 1 of 2

Many investors might focus too much on quarterly earnings and short-term economic trends. I prefer companies with good business models which equips them with the ability to weather recessions. Praxair, Inc. (NYSE:PX), one of the largest producers and distributors of industrial gases in the world, is one of the stocks that caught my eye.

It boasts of strong recurring revenue and pricing power that is validated by its stellar financial track record. Although it is valued at a premium to its peers, this is justified by a higher relative profitability vis-à-vis its peers. I like Praxair, Inc. (NYSE:PX) for its defensiveness, given current uncertain economic conditions.

Strong recurring revenue underpinned by long-term contracts

Praxair, Inc. (NYSE:PX) typically signs 15 year take-or-pay contracts with industrial companies and constructs on-site air-separation plants supplying gases directly to their client’s facilities. In addition to the long tenure of the contracts, renewal rates tend to be high. This is because there is an element of “stickness” in this business, with alternative suppliers having to build new on-site separation plants from the scratch.

This on-site business segment accounts for about a quarter of Praxair, Inc. (NYSE:PX)’s revenue. Its merchant liquid business, representing about 30% of its revenue, is governed by exclusive supply agreements with customers located in the vicinity of its plants.

Praxair, Inc. (NYSE:PX) grew revenue by an impressive 10-year CAGR of 8.2%, with revenue increasing in every single year for the past decade except for 2009. During the Global Financial Crisis, Praxair’s revenue fell 17% in 2009, before rebounding strongly by 13% the following year.

Products have high benefit-cost ratios

Praxair, Inc. (NYSE:PX)has not suffered any loss in the past 10 years from 2003 to 2012. It has also demonstrated high gross margin stability, with gross margin staying within a narrow range of between 39%-43%. This is reflective of the pricing power enjoyed by Praxair as a result of the high benefit-cost ratio of its products.

Industrial gases are vital in the operation of customers’ facilities such as steel mills and oil refineries, but make up a very small proportion of the total manufacturing cost of its products. Consequently, customers are less price-sensitive and Praxair, Inc. (NYSE:PX) is able to maintain its gross margin in both good and bad times.

Growth drivers

Increasing intensity of gases will be the key organic growth driver for Praxair. For example, U.S. steel producers are increasingly substituting natural gas for pulverized coal or coke as a source of carbon in their production process because natural gas is cheaper. Management estimates that there is a 25% increase in oxygen usage if natural gas is used instead of pulverized coal.

In terms of inorganic growth, Praxair, Inc. (NYSE:PX) acquired NuCO2, U.S.’ largest provider of fountain beverage carbonation, in March this year. This acquisition provides two major benefits. Firstly, Praxair was previously a supplier to NuCO2; this vertical integration effort should result in positive cost synergies. Secondly, there are opportunities for Praxair to introduce this fountain beverage carbonation model in other countries where beverage carbonation cylinders are still the norm.

Peer comparison

Air Products & Chemicals, Inc. (NYSE:APD)

Praxair’s peers include Air Products & Chemicals, Inc. (NYSE:APD) and Airgas, Inc. (NYSE:ARG). Praxair is valued at a premium to its peers with a forward P/E of 17.4, but it also has the highest ROA of the three at 8.3%.

Air Products is Praxair, Inc. (NYSE:PX)’s closest comparable, being the second largest U.S. industrial gases producer behind Praxair. I prefer Praxair over Air Products because Air Products & Chemicals, Inc. (NYSE:APD) has a relatively higher exposure to the under-performing electronics sector and the European region, which were responsible for a 4%-5% downward revision of full year 2013 EPS guidance at its fiscal second-quarter 2013 results call.

Page 1 of 2

Biotech Stock Alert - 20% Guaranteed Return in One Year

Hedge Funds and Insiders Are Piling Into

One of 2015's best hedge funds and two insiders snapped up shares of this medical device stock recently. We believe its transformative and disruptive device will storm the $3+ billion market and help it achieve 500%-1000% gains in 3 years.

Get your FREE REPORT and the details of our 20% return guarantee today.

Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.
Loading Comments...

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 102% in 3 years!! Wondering How?

Download a complete edition of our newsletter for free!