In my opinion, 2009 is about defense as the global economic picture worsens and the domestic outlook follows. There is nothing like unemployment north of 7% to seriously second-guess the strength of a nation. The companies below have displayed an ability to outperform their peers in a contracting economy and down market, while also exercising good judgment with their financial health. The priority of 2009 will be to minimize losses and the companies mentioned below should surely help you sleep easier at night.
Praxair Inc. is the largest industrial gases supplier in North and South America, supplying primarily atmospheric gases and related services to a multitude of end markets. Praxair’s products are offered in three methods; on-site tonnage, merchant liquids, and packaged gases. On-site tonnage has the largest volumes in the form of plants built adjacent to the customer’s facility with 10-20 year contracts set in place. Merchant liquids are delivered in smaller volumes by tanker trucks to storage containers. Packaged gases are supplied in cylinders that are sold independently through retail stores. Praxair serves over 25 different end markets in various regions, over 50% of their revenues are from sources outside the U.S.
Praxair’s strengths as a defensive play are their solid backlog, pricing power, and expanding margins. Praxair announced in early December that Q4 earnings would be lower in response to lower volumes- not totally unexpected. With a tighter credit environment it’s believable that many manufacturers (clients of Praxair) are de-stocking through closed capacity and delaying the purchases of industrial gases necessary to continue operations. What is promising about Praxair is their backlog of projects is fully in tact with no indication of any major projects stalling in 2009. Coal gasification and hydrogen projects in China should help to offset lower volumes domestically.
Praxair’s Q3 earnings are a prime example of their ability to successfully operate profitably and still grow in a recessionary environment. Sales growth for Q3 was 20% while volumes and prices increased 3% and 7% respectively. Volumes, prices, and sales grew a significantly at 14%, 11%, and 26% YoY, and to reiterate their ability to excel in down times, volumes, prices, and sales grew 2%, 3%, and 3% from three months prior. Operating profits have not lost momentum either, increasing just over 18% YoY for the nine months ended September 30, 2008. Also, Praxair implemented $80M cost savings plan that is 90% geared towards lowering overhead. Lower natural gas prices also help Praxair with cost pass-through agreements with many of their long-term contracts.
Overall, Praxair has a solid business model that has weathered the yearlong recession well. They have done a good job of managing investor expectations by lowering EPS guidance for Q4, but even this minimal drop is drastically better than the sub-sector as a whole. Praxair has the potential for a breakout performance this year with its resilient backlog, cost management, and healthy organic sales growth.
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- Darrell Reid
Disclosure: The mutual fund the author manages is long PX.