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

Page 2 of 2

Praxair generates less than 10% of its sales from customers in the electronics sector, compared with Air Products which generated approximately a quarter of revenue from this segment. Semiconductor production remained weak, affecting silicon growth, with recovery in the semiconductor industry expected only in 2014, according to Solid State Technology. Air Products & Chemicals, Inc. (NYSE:APD) derived 27% of its fiscal 2012 revenue from Europe; while Europe represented about 13% of Praxair, Inc. (NYSE:PX)’s turnover for 2012. The Organization for Economic Co-operation and Development revised its growth forecast for the Eurozone downwards from a 0.1% contraction to a 0.6% slump in its latest report.

Airgas, Inc. (NYSE:ARG) is the leader in packaged gases and welding hardgoods market in the U.S. with a quarter of the market share. Praxair is a close second with about half the market share of Airgas. Airgas’ key competitive edge over competitors is its full service offering, complementing its core gas offerings with welding and on-site safety services. Airgas expects a 15%-23% growth in fiscal year 2014 diluted EPS on the back of incremental operating income gains from its SAP implementation and improved business conditions in the second half of fiscal 2014. However, I am negative on Airgas, given that it has the weakest balance sheet of the three with a gearing of 175%.

Conclusion

While Praxair seems overvalued with a PEG of 1.6, comparing its trailing P/E of 21.3 with its ROE of 25.9% shows a different picture. The relative comparison of P/E and ROE is a quick rule of thumb to determine if a stock is undervalued relatively to its profitability. In addition, its strong recurring revenue and pricing power are validated by its long-term profitability track record, making it a buy in my books.

Mark Lin has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

The article Recurring Revenue and Pricing Power Make This Stock a Buy originally appeared on Fool.com.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Page 2 of 2