Industrial gas producer and supplier, Praxair Inc’s (PX) long-term growth prospects look bright on the back of world class technology, high quality products and rapidly growing gas supply services worldwide. This has compelled us to maintain a Neutral recommendation on Praxair, despite the company facing a number of near-term headwinds.
Praxair’s products are being increasingly used for various purposes across diverse industries, including hydrogen for refining; oxygen for healthcare; and nitrogen and carbon dioxide for oil and gas production. Of the end markets, the company anticipates that Manufacturing will comprise 25% of sales, Metals 17%, Energy 14%, Chemicals 11%, Healthcare 6%, Electronics 8%, Food & Beverages 8%, Aerospace 2% and Others 9% by 2017.
Also, the company is focused on expanding its operating regions and adding new customers to its existing sphere of businesses. In this regard, strategic acquisitions of NuCO2 in California, Volgograd in Russia and Dominion in Scotland in 2013 are worth mentioning.
Also, a robust backlog of $2.2 billion, from 32 projects, will work in favor of Praxair. In 2013, three major hydrogen projects under long-term supply agreements were completed while one in Brazil and another in Korea were signed in Jan 2014.
The operating environment is anticipated to be favorable for Praxair in 2014, especially in the Energy, Manufacturing and Materials industries of North America. Growth in Brazil, northern Europe and Russia are expected to be positive while stability in volumes is expected in southern Europe. Project start-ups are expected in China, India and Korea. Further, the company will continue to reward its shareholders through dividend payments and share buybacks.
Due to high international exposure, Praxair faces risks from foreign currency exchange rates, import and export controls, and other economic, political and regulatory policies of local governments. Revenue growth in the fourth quarter 2013 was pulled down by 2% due to an adverse foreign exchange translation impact. Also, the company anticipates a negative impact of 3% from foreign currency translation in 2014.
Increasing debt levels will weigh on the company’s financial burden and affect its profitability. In the fourth quarter 2013, interest expense rose 60% year over year. Moreover, the rise in cost of sales and services as well as operating expenses has been a cause of concern for Praxair over time.
Other Stocks to Consider
Praxair currently has a market capitalization of $37.6 billion and carries a Zacks Rank #4 (Sell). Some better-ranked stocks in the industry include Methanex Corp. (MEOH), Northern Technologies International Corp. (NTIC) and The Dow Chemical Co. (DOW). While Methanex and Northern Technologies carry a Zacks Rank #1 (Strong Buy), The Dow Chemical holds a Zacks Rank #2 (Buy).