In this article, let's take a look at Praxair Inc. (PX, Financial), a $37.84 billion market cap company, which is the largest producer of industrial gases in North and South America. It also provides ceramic and metallic coatings.
Diversification
Although Praxair is a leader in North and South America, the company focuses on emerging markets, which are considered faster-growing global markets. This includes regions such as Asia and the Middle East and countries like Mexico and Russia.
Further, its concentration to North America operations has dropped to around 50% from 65% of total revenue, which we think it is a good strategy for diversification.
Moreover, the industrial gases are used in various end markets, like autos or chemicals or others such as health care and food, which means that the firm has also an industry diversification.
Revenues
Revenue grew by 4.34% led earnings per share increased in the most recent quarter compared to the same quarter a year ago ($1.62 vs $1.49). During the past fiscal year, the company increased its bottom line. It earned $5.87 versus $5.61 in the previous year. This year, Wall Street expects an improvement in earnings ($6.27 versus $5.87).
Margins
The company has a track record of operating margins far above its peers, due to its product mix of industrial gases. The gross profit margin is at 43.38% but it has decreased from the same quarter last year. The net profit margin is at 15.18% which is ranked higher than 96% of the 1,120 companies in the Specialty Chemicals industry.
Profitability
The net income increased by 7.2% when compared to the same quarter one year prior, from $445 million to $477 million.
Let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| PX | Praxair | 28.37 |
| ARG | Airgas | 19.37 |
| AVD | American Vanguard Corp | 1.28 |
| CBT | Cabot Corp | 10.03 |
| Â | Industry Median | 7.11 |
The company has a current ROE of 28.37% which is higher than the industry median and the ones exhibit by Airgas (ARG, Financial), American Vanguard (AVD, Financial) and Cabot (CBT, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 20.6x, trading at a discount compared to an average of 25.2x for the industry. To use another metric, its price-to-book ratio of 5.78x indicates a premium versus the industry average of 1.62x while the price-to-sales ratio of 3.14x is above the industry average of 1.1x.
As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10,000 five years ago, today you could have $16,669, which represents a 10.8% compound annual growth rate (CAGR).
Final comment
As outlined in the article, we have seen growth in earnings per share, revenue growth, very good ROE, increase in net income and expanding profit margins.
The PE relative valuation makes me feel bullish on this stock.
Hedge fund gurus like Chris Davis (Trades, Portfolio) and Ray Dalio (Trades, Portfolio) have added this stock to their portfolios in the third quarter of 2014, as well as Diamond Hill Capital (Trades, Portfolio).
Disclosure: Omar Venerio holds no position in any stocks mentioned
