Investment Jungle

For today’s analysis, I have selected Praxair Inc which trades on the NYSE under the symbol PX. Is this a possible Rule #1 stock? Let’s find out together.

Company Profile:

From Yahoo Finance

Praxair, Inc. engages in the production, sale, and distribution of industrial gases worldwide. Its primary products include atmospheric gases, such as oxygen, nitrogen, argon, and rare gases; and process gases, such as carbon dioxide, helium, hydrogen, electronic gases, specialty gases, and acetylene. The company designs, engineers, and builds equipment that produces industrial gases. It also supplies surface coatings, including wear-resistant and high-temperature corrosion-resistant metallic and ceramic coatings, and powders to aircraft, printing, textile, plastics, primary metals, petrochemical, and other industries. In addition, the company manufactures electric arc, plasma, and high velocity oxygen fuel spray equipment, as well as arc and flame wire equipment used for the application of wear resistant coatings.

Market capitalization of $23.88B.

Fundamental Analysis:

This analysis starts off with an interesting dilemma. I am looking at the return on invested capital and for the first 5 years, Praxair did not meet our Rule #1 investor minimum ROIC of 10%. However, the last 5 years do meet our minimum 10%. The 5 year average ROIC is 11.3%. It is almost like they are two separate companies!

However, the return on equity has been quite consistent over the last 10 years. The 10 year average ROE is 19.54% and the 5 year average ROE is 20.41%.

At least management has been able to deliver the better ROIC while maintaining their ROE.

The equity growth rate does not deliver Rule #1 numbers over the entire time period. The 9 year rate comes in at a sub par 8.21%. However, the 5 year rate picks up at 14.75%. The 3 year rate stays steady at 13.84% and last year’s equity growth rate increased to 17.25%. However, looking at the individual years, Praxair had no less than 6 years where the growth rate did not meet our 10% minimum.

Earnings per share growth rate follows a similar trend. The 9 year rate is sub par at 9.72% (although very close to our 10% minimum). The 5 year rate moves to 14.59%. The 3 year rate jumps to 19.18% and last year’s rate was 17.53%. In this case, only 4 years did not meet the 10% minimum.

Sales growth rates have been fairly steady. The 9 year rate is 6.49%. The 5 year rate jumps to 11.33%. Last year’s rate drops back down to 8.73%.

Cash flow growth rate has remained quite steady with the 5 year rate and last year’s rate both in the 12% range.

Even if I discount the earlier time period, I would still argue that this stock does not meet our Rule #1 criteria. Too many individual years were sub par. Although 1 big year (for example, the 31.35% equity growth rate in 2003) is able to skew the more recent results above the 10% minimum.

Stock Analysis:

You know that I still want to calculate a sticker price!

For my future P/E, I chose the 10 year average P/E of 17.49 which is the most conservative historical P/E. It is considerably lower than the current P/E of 23.34.

For my future EPS growth, I tried to be generous by using the 5 year equity growth rate of 14.75% instead of the 9 year rate of 8.21% (which is my normal practice). But analysts have only forecast 13.2% future EPS growth rate. So I will use their forecast.

With this information, my sticker price works out to $48.41. At the current price of $75.61, Mr. Market is demanding a premium of 56.2%.

Here is my Rule #1 stock analysis of PX.

Here is the 1 year stock price chart:

Praxair Inc has definitely been on a very nice run. My sticker price has not been available for the last 12 months.

Conclusion:

Unfortunately, this stock does not meet our Rule #1 criteria although it did give it that old college try over the last 5 years.

Full disclosure: I do not own shares in PX.

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