Praxair: Earnings Preview

Jul.27.10 | About: Praxair, Inc. (PX)

Praxair Inc. (NYSE:PX) is slated to release its second-quarter 2010 results on Wednesday, July 28, 2010. The current Zacks Consensus Estimate for the second quarter earnings per share (EPS) is $1.14, representing an annualized growth of 18.54%.
With respect to earnings surprises, over the trailing four quarters, Praxair underperformed the Zacks Consensus Estimate in one quarter, out performed in another and was in line with in two quarters. The average earnings surprise was a negative 0.52%, implying that the company has lagged behind the Zacks Consensus Estimate by the same magnitude over the last four quarters.
First-Quarter Performance
Praxair’s first quarter earnings for fiscal 2010 were $340 million, representing an increase of 17.2% year over year from $290 million in the year-ago quarter. Reported EPS were $1.09, in line with the Zacks Consensus Estimate, while increasing from $0.93 in the first quarter of fiscal 2009. EPS was also within the company’s expectations. Net earnings grew based on an increase in total revenue.
During the quarter, net revenues were $2,428 million, 14.4% up from $2,123 million as in the corresponding period of the previous year. The increase was attributable to the boost in sales volume across most end markets.
Revenue from North America, which contributed 51% of total revenue, moved up by 6.4% year over year, while revenue from Europe grew 11.6%. Revenue generated from South America and Asia soared 29.7% and 43.3%, respectively. Finally, revenue from Surface Technologies increased 10.6%.
Gross profit increased 12.8% and margin grew 60 basis points. Selling, general and administrative (SG&A) expense dropped 40 basis points and research and development (R&D) expense remained flat at $18 million. Operating margin slipped 110 basis points because of the slight decrease in operating expense in relation to an increase in total revenue.
At the end of first quarter, cash & cash equivalents were $376 million, from just $45 million at the end of the previous quarter. Net debt decreased to $4,457 million from $4,939 million at the end of the fourth quarter of fiscal 2009. Cash flow from operations improved by $134 million to $483 million. Capex dropped from $293 million to $288 million. For 2010, management expects capex to be approximately $1.4 billion.
For the second quarter of fiscal 2010, management expects EPS to be within $1.10 – $1.15 and for 2010, it expects EPS in the range of $4.50 – $4.65. For 2010, revenue is expected to be approximately $10 billion.
Agreement of Estimate Revisions
In the last 30 days, out of the 17 analysts covering the stock, two decreased their EPS estimates for 2010, while one brought it down for 2011. None of the analysts increased their estimates for 2010 and 2011. For the second quarter 2010, estimates were pulled down by two analysts, while one analyst increased it.
Overall, the estimates revision trend in the second quarter, 2010 and 2011 points to negative impacts from concerns over macroeconomic issues and volatility in foreign currency exchange rates.
Magnitude of Estimate Revisions
Estimates over the last 30 days remained unchanged at $1.14 for the second quarter and $4.62 for 2010, while decreasing by one cent from $5.23 to $5.22 for 2011, implying that the analysts do not see any meaningful catalyst for the time being.
The current Zacks Consensus Estimate is $4.62 for 2010, reflecting a year-over-year growth of 15.72% and $5.22 for 2011, reflecting a year-over-year growth of 12.96%.
Our Take
We believe that Praxair remains well-positioned to leverage from its intense focus on expanding its reach within its operating regions, and broad end-market exposure to food and beverage, steel, glass and chemicals.
However, Praxair’s large international presence increases risks related to fluctuations in foreign currencies and geopolitical uncertainties. Also, volatility in energy prices increases risks of energy supply in adverse economic conditions. The company faces stiff competition from Air Products and Chemicals Inc. (APD); Airgas Inc. (ARG); Linde AG; Chromalloy Gas Turbine Corporation and Bodycote (BOY.L).
We currently maintain our Neutral recommendation on the stock, supported by Zacks #3 (Hold) Rank.