Praxair Inc - Zacks Investment Research



| Praxair Inc. |(PX-NYSE) |$114.10 |

Note: This report contains substantially new material. Subsequent reports will have new or revised material highlighted.

Reason for Report: 1Q13 Earnings Update

Prev. Ed.: January 28, 2013; 4Q12 and 2012 Earnings Update

Brokers’ Recommendations: Positive: 64.7% (11 firms); Neutral: 29.4% (5); Negative: 5.9% (1) Prev. Ed.: 9; 6; 1

Brokers’ Target Price: $124.36 (↑$3.67 from the last edition; 14 firms) Brokers’ Avg. Expected Return: 9.0%

Portfolio Manager Executive Summary

Praxair Inc. (PX or the company) is a global company that supplies atmospheric process and specialty gases, high-performance coatings, and related services and technologies to a wide diversity of customers. Praxair is the number one industrial gases company in North and South America and one of the largest in the world.

Out of the 17 firms covering the stock, 64.7% provided positive ratings, 29.4% offered neutral ratings while one firm (5.9%) gave a negative rating. Target prices range from a low of $114.00 to a high of $135.00, averaging roughly $124.36.

Buy or equivalent outlook (11/17 firms or 64.7%) – These firms believe that Praxair will be able to improve its results based on the company’s focus on geographic expansion. Most of the regions the company operates in are performing well with a few exceptions. These analysts contend that Praxair will be able to increase sales mainly in Asia, driven by growth in China, India, Korea and Thailand. Moreover, the signs of improvement in the Brazilian markets raise hope.

New plant start-ups and an encouraging backlog are added advantages. Praxair has also lowered its capital spending guidance for 2013 compared with 2012, indicating more free cash flow available for share buybacks etc.

Neutral or equivalent outlook (5/17 firms or 29.4%) –These firms though believe in the company’s long-term growth prospects and near-term opportunities as discussed above, they prefer remaining on the sidelines since the company is largely affected by near-term headwinds surrounding it. Economic difficulties in Europe still pose a threat to the company’s prosperity. To add to the peril, are impacts emanating from negative foreign currency translation and higher interest and pension expenses.

Negative or equivalent outlook (1/17 firm or 5.9%) – We did not have access to the report from the broker providing sell recommendation on the stock.

June 24, 2013

Overview

The analysts have identified the following key factors for evaluating the investment merits of PX:

|Key Positive Arguments |Key Negative Arguments |

|Key Developing Platforms: Improvement in the key developing platforms of |High Raw Material Costs: Energy is the largest cost item for Praxair. |

|refinery, electronics, and healthcare acts as a positive catalyst for the |Fluctuation in the prices of electricity, natural gas and diesel fuel, |

|company. |which are somewhat affected by global economic conditions might impact the|

|New Projects: There is a pipeline of new projects in the emerging markets, |company’s finances adversely. |

|which is expected to increase the growth rate of the company. |Leverage: Praxair’s debt to capitalization ratio is approximately 56%. |

|Strong Capital Structure: Management’s focus on reducing costs and capital |Relatively high levels of leverage are likely to persist, given the |

|allocation discipline through many initiatives is leading to an increase in |capital intensive nature of the business. |

|PX’s free cash flow. |Global Enterprise: Being globally operational, Praxair’s financials are |

|Focus outside the US: Excluding hydrogen refining in the US, backlog |exposed to foreign currency risks and geopolitical risks. |

|continues to be weighted toward South America, China, Russia and India due to| |

|better growth prospects in those regions versus a slow growth outlook for the| |

|US and Europe. | |

Connecticut-based Praxair Inc. (PX or the company) is the largest industrial gas company in North and South America and is engaged in the production and distribution of industrial gases worldwide. The company’s products include atmospheric gases comprising oxygen, nitrogen, argon, rare gases and process gases, such as carbon dioxide, helium, hydrogen, electronic gases, specialty gases, and acetylene. The company also designs, engineers, and builds equipment that produce industrial gases, precious metal and ceramic sputtering targets used primarily in the production of semiconductors. It also provides aircraft engine and airframe component overhaul services, and manufactures electric arc, plasma and oxygen fuel spray equipment, as well as arc and flame wire equipment used in wear resistant coatings. It serves various industries including healthcare and petroleum refining; computer-chip manufacturing and beverage carbonation; fiber-optics and steel making, aerospace, chemicals, and water treatment.

The company is primarily engaged in two businesses – Industrial Gases and Surface Technology. Primary products of the Industrial Gases business are atmospheric and process gases. Atmospheric gases, such as oxygen, nitrogen, and argon are produced through several air separation processes while process gases, such as carbon dioxide, hydrogen, carbon monoxide, helium, and acetylene are produced by methods other than air separation. The Industrial Gases business is divided into four regional segments: North America, South America, Europe, and Asia. The Surface Technology segment operates through Praxair Surface Technologies Inc. and supplies wear-resistant, high-temperature, corrosion-resistant metallic, and ceramic coatings and powders. Further information on the company is available at:

Note: The company’s fiscal year references coincide with the calendar year.

June 24, 2013

Long-Term Growth

Praxair adjusts its business policies according to the requirements of different regions, and it mostly focuses on countries including the U.S., Canada, Mexico, Brazil, Italy, Spain, Germany, China, India, Korea, and Thailand – which are expected to account for a major portion of global industrial production growth for the next five years. The company believes that a disciplined regional focus will enable it to gain local market share, increase in production, and improvement in the density of its distribution, which in turn, will allow it to win a larger share of projects with attractive returns on capital. A network of attractive onsite projects within a country where the company has a high market share will likely lead to more opportunities for faster and more profitable growth.

By 2015, Praxair’s management targets to achieve annual organic sales growth of 8%-12%; with an anticipation of emerging markets (South America, Asia, and Mexico) to account for roughly 45% of total sales; operating profit to be within the 10%-15% range, primarily benefiting from higher productivity and effective pricing actions; earnings would grow within the 12%-18% range; EBITDA to be roughly 30% of total sales and capital spending approximately 15% of sales. After-tax return on capital is expected to be over 15%, while the company aims to maintain sufficient free cash flow to pay increasing dividends and repurchase shares.

In the month of Apr 2013, Praxair entered into a long-term contract with North West Redwater for the operation of an air separation plant in Alberta. The plant is expected to have a capacity of 2,000 tons a day of oxygen and associated volumes of nitrogen and merchant argon. After its start by mid-2016, the plant is expected to drive greater revenues for Praxair.

The company has significant growth opportunities in diverse markets, including hydrogen for refining; oxygen for healthcare; and nitrogen and carbon dioxide for oil and gas production. The demand environment for hydrogen refining capacity, particularly is very strong as over the period 2010-2015, is expected to grow by 2% in US/Europe, 15% in India, 20% in China, 24% in the Middle East, and 25% in Brazil. The company has an expectation of a 20% volume growth for hydrogen per annum, going forward.

The analysts further believe that the company's business model is attractive with long-term take-or-pay contracts in its tonnage business. In addition, the company operates in an oligopoly that lead to a substantial backlog of high-return projects leveraged to energy and emerging markets that will likely continue to drive its earnings increase, going forward.

June 24, 2013

Target Price/Valuation

Provided below is the summary of valuation and ratings as compiled by Zacks Research Digest:

|Rating Distribution |

|Positive |64.7%↑ |

|Neutral |29.4%↓ |

|Negative |5.9%↑ |

|Avg. Target Price |$124.36↑ |

|Digest High |$135.00↑ |

|Digest Low |$114.00↑ |

|No. of analysts with target price/Total analysts |14/17 |

Risks associated with the target price primarily include rising interest rates, the inability to cover escalating energy costs (electricity, natural gas and diesel fuel for distribution) via price increases, shortage of key purchased raw materials, such as argon and helium, higher US dollar exchange rates, and slowing demand in Praxair's energy, manufacturing, and metal fabrication end markets.

Recent Events

On Jun 24, 2013, Praxair acquired southern Russia based Volgograd Oxygen Factory (VOF), for an undisclosed amount. VOF has a customer base of more than two thousand. The strategic step is taken to expand the company’s presence in the region.

On Jun 20, 2013, Praxair announced its intentions to build its second air separation plant in the Port of Antwerp. In the process, it will also extend its pipeline system in the same region. The plant is expected to start functioning by early 2016.

On Jun 17, 2013, Praxair paid a quarterly dividend of $0.60, to its shareholders of record as on Jun 7, 2013.

On May 29, 2013, Praxair acquired Dominion Technology Gases Investment Limited for an undisclosed amount. Prior to the acquisition, Dominion was majority-owned by UK based mid-market private equity firm, Graphite Capital.

On Apr 29, 2013, Praxair Inc. priced $650 million worth of Notes, offered under the company’s universal shelf registration statement. The offering was completed on May 7, 2013.

On Apr 24, 2013, Praxair Inc. reported its financial results for 1Q13. Adjusted earnings per share came in at $1.38; no change from the year-ago quarter’s earnings. Praxair reported total revenue of $2,888 million in the first quarter, up 2.0% year over year.

Including a loss from the Venezuela currency devaluation, GAAP earnings for the quarter were $1.30 per share, down from $1.38 in the year-ago quarter.

On Apr 22, 2013, Praxair’s subsidiary, Praxair Canada Inc. inked a contract with North West Redwater Partnership (NWR); to build an air separation plant at NWR’s Alberta based Sturgeon Refinery.

On Apr 17, 2013, Praxair’s Bahrain subsidiary initiated its air separation plant in the Kingdom of Bahrain. The plant will be used to supply gases to United Steel Company (SULB) B.S.C.

On Apr 12, 2013, Brazilian subsidiary of Praxair started operations at its air separation plant in the state of Mato Grosso, Brazil, in order to supply gases to Eldorado Celulose e Papel’s single-line pulp mill.

On Apr 11, 2013, Praxair acquired merchant carbon dioxide business of Tri-State Carbonic, for an undisclosed amount. The acquisition will help Praxair to supply the gas to its customers in the Cincinnati and Louisville regions.

On Mar 1, 2013, Praxair concluded the acquisition of NuCO2 Inc. from Aurora Capital Group for a total consideration of $1.1 billion. Praxair intends to grow its beverage carbonation business globally through this acquisition.

Revenue

As reported by the company, total revenue in 1Q13 was $2,888 million, up 2.0% year over year. The results were adversely impacted by lower working days, negative foreign currency translation, and cost pass-through; excluding which total revenue grew by 4%.

As on Mar 31, 2013, the company had $2.5 billion worth of backlog in large plants under construction, which signifies a healthy sales growth for Praxair.

The company’s operations through prime business segments are detailed below:

North America (50.5% of 1Q13 total revenue): During the quarter, healthy performance at manufacturing, energy, and food and beverage markets pushed North American revenue by 4% y/y to $1,457 million. Negative volume growth of 3% was more than offset by positive change of 3% in price, 1% in cost pass-through and 3% in acquisitions.

South America (18.4% of 1Q13 total revenue): Revenue in South America decreased 6% y/y to $531 million. Negative foreign currency translation of 10% over powered the 2% positive volume, 1% positive cost pass-through and 1% price impacts.

Europe (12.8% of 1Q13 total revenue): European revenue in the quarter dropped 2% y/y to $370.0 million. Negative volume growth of 3% and cost pass-through impact of 1% more than offset the 1% positive price and foreign currency translation impacts.

Asia (12.7% of 1Q13 total revenue): Revenue from Asia was up 10% to $367 million, driven by volume growths in India, China and Korea. Volumes increased 11% year over year while price impacted growth negatively by 1%.

Surface Technologies (5.6% of 1Q13 total revenue): Revenue from Surface Technologies was $163.0 million, down 4% y/y, due primarily to weak business industrial and military aviation coatings businesses.

Outlook

Management expects revenue generation in 2Q13 to be up 2%-3% sequentially. In the North American region, strong project backlogs as well as start-ups of large hydrogen projects including two for Valero, one at Port Arthur and another at St. Charles, in 2013 will prove advantageous. Additionally, the company intends to initiate four air separation plants in North America in 2013.

South America is expected to benefit from the start up of around six projects in the quarters ahead, across four countries; viz., Brazil, Peru, Argentina and Uruguay. Asia sales, especially China are also expected to benefit from the new plant start ups.

Most of the brokerage firms believe that the company has a bright future ahead. Revenues are expected to improve in 2013 over 2012, due to new plant start-ups. Moreover, the recent acquisition of NuCO2 is expected to contribute significantly to the revenue. Asia seems promising due to an increase in revenue generation from countries like China, India, Thailand and Korea. Moreover, Brazil looks attractive with improvements in March and April this year. North America is also expected to improve while Europe still remains the possible stumbling block.

Margins

As reported by the company, gross profit in 1Q13 was $1,250 million, up 2.1% y/y while gross margin was 43.3%, up 20 basis points (bps) y/y. Cost of sales increased 1.4% year over year and represented 56.7% of the total revenue.

Operating expenses in the quarter increased on a y/y basis. Selling, general and administrative expenses (SG&A) were $337 million, up 0.6% y/y; research and development expense (R&D) was flat at $24.0 million and depreciation and amortization was $266.0 million, up 5.6% y/y.

Operating profit was almost flat at $623 million while operating margin stood at 21.6% versus 22.1% in the year-ago quarter. Interest expense was up 8.1% to $40.0 million.

Outlook

Effective tax rate guidance is projected to be 28% for 2013.

Praxair is making efforts to reduce the operational costs by shutting down or consolidating facilities in some of its regions. This in turn is expected to bring about margin improvements. After the next two years, management expects cost synergies to the extent of $20 million from the acquisition of NuCO2.

A few brokerage firms believe that the company’s continuous efforts to curb costs will pave the way for better margins. However, they do not negate the effect of rising prices of energy and raw materials, which may increase costs and reduce margins in the future.

Earnings per Share

As reported by the company, adjusted EPS in 1Q13 was $1.38, no change from the year-ago quarter’s earnings and in line with the Zacks Consensus Estimate.

Including a loss from the Venezuela currency devaluation, GAAP earnings for the quarter were $1.30 per share, down from $1.38 in the year-ago quarter. Earnings were within management’s predicted range of $1.35-$1.40 per share.

Outlook

For 2Q13, management projects earnings per share to be within the $1.45-$1.50 per share range.

For 2013, EPS guidance has been revised from the previously expected range of $5.85-$6.10 per share to $5.90-$6.05. The increase in the lower level indicates contribution from the NuCO2 acquisition while the reduction in higher end of the range is a result of lower than expected economic growth in regions like the U.S., Canada and Europe. The guidance assumes a contribution to the extent of $0.02 earnings per share per quarter from the NuCO2.

The new guidance, however, represents a year-over-year rise in earnings for all the remaining quarters of 2013, with a double digit earnings growth in the fourth quarter.

Most of the brokerage firms maintain their earnings per share estimate for 2013, based on a modest first quarter result. They believe that management is taking a cautious approach while guiding, however, the company will benefit from new project start ups and increased production. Further, they expect earnings per share in the second quarter of 2013 to be higher than the first quarter due to more number of working days as well as improvements in some of the geographical regions.

– The Online Stock Research Community

Discover what other investors are saying about Praxair Inc. at:

PX profile on

|Research Analyst |Shilpa Maheshwari |

|Copy Editor |Sreela Bose |

|Content Ed. |Payal Jalan |

|QCA |Supriyo Bose |

|Lead Analyst |Payal Jalan |

|No. of brokers reported/Total brokers |9/17 |

|Reason for Update |1Q13 Earnings Update |

-----------------------

June 24, 2013

................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download