Praxair and Air Products Stock Analysis – Buy Both When Fairly Valued

Contents

Summary

Praxair reported strong Q3 2017 results on October 26, 2017 and provided an update on its proposed merger with Linde.
The successful completion of the Praxair Linde merger in the 2^nd half of 2018 will make the combined entity the largest player in the industry.
Air Products reported strong Q4 and FY2017 results from continuing operations. With its strong balance sheet management expects to invest over $8B over the next three years.
In FY2017, Air Products divested non-core assets through the spin-off of Versum Materials and the sale of Performance Materials.
Both companies are expensive at current levels. I will monitor both companies with the intent of eventually acquiring shares in both companies when they are more attractively valued.

Introduction

In the early 1990s, when I was in the Commercial Banking division of a major Canadian financial institution, I had a client who owned a small industrial gases company. One day he came to my office to inform me his major supplier (Messer Griesheim GmbH) had presented him with an offer that was beyond his, and my, wildest dreams.

This was long before the advent of the internet and discount brokers. In addition, my wife and I had just bought a house and paying off the mortgage was our primary focus. As a result, I had no surplus money to invest and researching companies back then was not easy. Had I had money to invest and easy access to material for investment analysis purposes I suspect I might have looked into investing in companies in the industrial gases industry.

Fast forward about 2.5 decades and you think that with the number of times I have seen the Praxair (NYSE: PX), Air Products (NYSE: APD), Linde (OTCMKTS: LNAGF), Air Liquide (OTCMKTS:AIQUY), and Airgas (acquired by Air Liquide) names I might have taken a moment or two to investigate the possibility of acquiring shares in some of these companies. Alas, I never did. Instead, I ended up investing in these highly recognizable names over the course of time.

Recently I was skimming through Fortune's list of companies and PX (#275) and APD (#294) caught my attention. Their annual revenue is currently very similar but this could change in the second half of 2018 if PX’s proposed acquisition of LNAGF receives regulatory approval.

In today’s post I take a quick look at both companies to determine whether they are priced appropriately to warrant adding them to the Financial Freedom is a Journey portfolio.

PRAXAIR

Business Overview

PX’s Vision, Mission, and Core Values can be found here.

PX, founded in 1907 and headquartered in Danbury, Connecticut, has operations in North and South America, Asia and Europe. Its primary products are atmospheric gases (oxygen, nitrogen, argon and rare gases) and process gases (carbon dioxide, helium, hydrogen, electronic gases, specialty gases and acetylene). It serves customers in approximately 25 industries as diverse as health care and petroleum refining, computer-chip manufacturing and beverage carbonation, fiber-optics and steel making, and aerospace, chemicals, and water treatment.

Approximately 56% of PX’s 2016 sales were outside the US. It is concentrating on emerging markets, including Asia, Mexico, Middle East and Russia, and several less capital-intensive, faster-growing global markets, such as health care, electronics and energy, in addition to core industrial gases.

Source: PX Investor Presentation Q3 2017 October 26, 2017

On December 20, 2016 PX and LNAGF announced their intent to merge. The merger of these companies would result in a global company with ~$29B in annual revenue and a more balanced portfolio.

Source: PX August 31, 2017 Proposed Merger Investor Presentation

Risk Factors

A comprehensive explanation of the company’s risk factors can be found on pages 15 - 19 in PX’s 2016 Annual Report.

Q3 2017 Results

On October 26, 2017, PX released its Q3 results for the quarter ending September 30, 2017. PX reported record free cash flow in Q3 which allowed it to reduce debt by $0.202B and to reward shareholders with $0.225B in dividends. PX has reduced share count from 302 million in 2012 to 288 million in 2016 but share buybacks have been placed on hold pending the outcome of the proposed merger.

A comparison of PX’s historical sales growth, diluted EPS growth, diluted EPS and free cash flow per share is likely going to be of little benefit in your investment decision making process because if the PX and LNAGF transaction is consummated in the second half of 2018, future results will be dramatically different from historical results. I am, therefore, restricting the level of data provided to 2016 and 2017.

Source: PX Q3 2017 Investor Presentation October 26, 2017

Dividend and Dividend Yield

PX has raised its dividend for 24 consecutive years. Its dividend and stock split history can be found here. Investors have certainly been rewarded with a CAGR dividend growth rate well in excess of inflation for the last several years.

Source: Morningstar

PX’s current ~2.1% dividend yield can be found here.

Valuation

PX’s 2017 EPS guidance is as follows

Source: PX Q3 2017 Investor Presentation October 26, 2017

and the current mean FY2017 adjusted EPS projections from various brokers is $5.78.

Source: TD WebBroker

On November 10, 2017, PX closed at $148.28. Using the $5.78 estimate from above, the forward PE is ~25.7. I view this as beyond a prudent level and am prepared to patiently wait for a pullback to the ~21 – 22 PE range; here’s hoping for a market correction. A price at or below ~$125 would really spark my interest.

Source: Morningstar