3 Industrial Gas Companies With Organic Growth Stories

Includes: AIQUF, APD, PX
by: Michael Loeb

I like dividend growth companies and growth stocks as 80% and 20% of my portfolio, respectively. This article surveys the Industrial Gases industry. As I hope to show through the following research, there are several worthwhile companies in this particular industry, and your choice really depends on your risk appetite.

The main players in the Packaged Gas industry by market cap are Praxair (NYSE:PX), Air Products and Chemicals (NYSE:APD), Airgas (ARG), and on foreign exchanges, Air Liquide (OTCPK:AIQUY). I won't get into Air Liquide because it trades in pink sheets in America, but it does have interesting investments in hydrogen cell batteries to look into.

The packaged gas industry serves several sectors of the economy by providing oxygen, nitrogen, argon, helium, hydrogen, and medical, specialty, welding, and cutting gases to businesses around the world. In addition to providing gas, the companies provide equipment instrumental in using their gases. Companies which use industrial gas range widely, from construction, energy, and agriculture, to healthcare, technology, and food/beverage industries, to name a few (Airgas and Air Products/Chemicals). Due to this diversification across sectors, all three companies are less exposed to downturns in any one industry. At the same time, the industry is not currently operating at full capacity because some of its industrial customers (primarily construction) have still not increased production after the recession, so they have room to grow organically.

Anyways, PX and APD are globally diversified packaged gas producers (hyperlinks to investor presentations provided PX ; APD). Airgas is focused almost exclusively in the United States, with a leading 25% position in the fragmented U.S. packaged gas industry.

As a younger investor, I am drawn to ARG's extraordinary growth and returns, and I am less worried by its more extreme negative returns during the 2008 bear market. To illustrate the example, ARG lost 52% of its value from August 2008 until March 2009 (vs. -38% and -45% for the Dow and S&P 500, respectively.

However, from the March 2009 lows, it has gained nearly 160% vs. roughly 80% for both indices. I am comfortable with that risk reward scenario, because it increased its dividend straight through the downturn and sports a 35.5% 5-yr dividend CAGR. PX and especially APD don't compare on either a capital appreciation basis (89% and 95%) or dividend CAGRs (10% and 9%).

Let's take a second to look at some fundamentals, courtesy of Yahoo! Finance:

Market Cap: 6.06B 18.99B 32.08B
Qtrly Rev Growth (yoy): 11.50% 1.30% 6.60%
Revenue (TTM): 4.61B 10.11B 11.25B
Gross Margin : 54.24% 27.14% 42.61%
EBITDA : 820.16M 2.51B 3.47B
Operating Margin : 12.02% 16.22% 21.94%
EPS : 3.6 5.57 5.45
P/E : 22.07 16.2 19.65
ROE(%) 15.84 20.41 28.32
Beta 0.95 1.21 0.93
Dividend (%) 1.6 2.6 2.1

Note that ROE and Operating Margin vary widely between the three competitors, and typical of my preferences-- two of three companies display low betas.

Now, the story is not completely bright for Airgas, primarily because it is not diversified globally in the way APD and PX are. While the ARG's investor presentations indicate 50% of the U.S. packaged gas market is fragmented (here), I would argue international markets offer some of the greatest long-term opportunities for top-line growth. So, while international markets-- especially European ones-- may be experiencing contractions in demand at the moment, long-term I like that APD and PX have already established global footprints.

Essentially, the story comes down to your preferences. APD and PX are the more stable, more global companies with higher dividend yields. ARG is the regional competitor with the best growth prospects of the bunch, and a strong history of increasing shareholder value.

In short, I recommend ARG, PX, and APD in that order. After all, all three have outperformed the Dow and S&P 500 since March 2009.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in ARG, PX over the next 72 hours.