02.05.18
Praxair, Inc. (PX: Hold, $151 PT)
Strong Volume in NA Drives EPS Upside
• Sales and earnings exceeded expectations. Praxair reported adjusted 4Q EPS of $1.52 vs. our $1.47E, consensus of $1.48, and the company’s prior range of $1.45-1.50. Results exclude a provisional charge of $394mn related to US tax reform. Sales of $2.95n came in well ahead our $2.85bn, driven primarily by better volumes, especially in North America (+8%). Volume growth of 7% overall accelerated from the 5% growth posted in 3Q17. In EPS terms, consolidated EBITDA of $973mn was a $0.09 beat against the $939mn we had penciled in. On a segment basis, EBIT outperformed our expectation in all segments except Asia, which was in line. We are encouraged by the acceleration of organic volume growth as it appears momentum in industrial macro indicators has translated to improved top line growth. Indeed, we attribute the earnings upside to positive variances in sales as both EBITDA and EBIT margins came in 10bps shy of our forecast on a consolidated basis. Praxair’s project backlog trended flat at $1.5bn as the company secured 8 new project wins, mainly in Asia and the US, offsetting 8 projects that came to fruition. FCF for 2018 increased 32% y-y to $1.7bn (3.7% yield). Commentary regarding Praxair’s pending merger with Linde suggests that the deal is on track with closing expected prior to October 2018.
• 1Q18 guidance reads positive; 2018 tax rate in line with our forecast. For 1Q18, Praxair expects EPS in the range of $1.53 to $1.58, which is essentially in line with our $1.55E, and better than consensus of $1.53. In a break with the company’s historical convention, Praxair did not put forth an EPS range for the full year. However, earnings guidance for 1Q18 appears constructive and the expected tax rate range of 23-25% is essentially in line with our forecast rate of 24.1% as revised for the new US tax regime. Pending commentary on the company’s conference call this morning, our $6.60E for 2018 seems reasonable or perhaps conservative...
• North America posted impressive volume. Sales volumes of 8% accelerated sharply from the 3% y-y growth pace witnessed in 3Q17. Praxair cited strong volumes along the US Gulf Coast as well as improvement in the sale of packaged (cylinder) gases, partially offset by a “slow recovery” in Puerto Rico. In terms of end-use markets, energy, manufacturing, chemicals and electronics led the way. Acceleration of growth is encouraging given the continued economic momentum, though comps will now become increasingly difficult...
• Asia in line despite strong sales. Sales in Asia were $470mn, up 19% y-y, and well ahead of the $452mn we had anticipated. However, EBIT was largely in line with our expectation at $90mn as margins in the Asia segment continue to be a source of relative weakness vs. our forecast; missing our mark by 110bps and finishing down 60bps y-y. Volumes of 11% continue...
• Europe and South America combine for a marginal tailwind. Together, these two segments represented a combined $5mn beat, or about $0.01 tailwind in EPS terms, relative to our forecast. Volume growth in Europe continues to chug along in the mid-single digit range, while South America shows further signs of stabilization...
• We rate PX shares Hold with a price target of $151. Our target suggests shares offer limited upside, including a dividend yield of 2.2%. As a reminder, we value PX based on an average of our DCF analysis and a relative P/E-based framework. Our DCF analysis suggests a warranted stock price of $121, and includes a weighted-average cost of capital (WACC) estimate of 7.8% and a terminal growth rate of 2.5%. Our relative P/E-based framework indicates a warranted value of $146 per share based on a 17.5% premium to the S&P500 index’s multiple as applied to our 2018 EPS estimate of $6.60. Finally, we continue to attribute additional value of $17 per share to reflect the expected value to be created from Praxair’s pending MOE with Linde.
(Please see full report for details)
Strong Volume in NA Drives EPS Upside
• Sales and earnings exceeded expectations. Praxair reported adjusted 4Q EPS of $1.52 vs. our $1.47E, consensus of $1.48, and the company’s prior range of $1.45-1.50. Results exclude a provisional charge of $394mn related to US tax reform. Sales of $2.95n came in well ahead our $2.85bn, driven primarily by better volumes, especially in North America (+8%). Volume growth of 7% overall accelerated from the 5% growth posted in 3Q17. In EPS terms, consolidated EBITDA of $973mn was a $0.09 beat against the $939mn we had penciled in. On a segment basis, EBIT outperformed our expectation in all segments except Asia, which was in line. We are encouraged by the acceleration of organic volume growth as it appears momentum in industrial macro indicators has translated to improved top line growth. Indeed, we attribute the earnings upside to positive variances in sales as both EBITDA and EBIT margins came in 10bps shy of our forecast on a consolidated basis. Praxair’s project backlog trended flat at $1.5bn as the company secured 8 new project wins, mainly in Asia and the US, offsetting 8 projects that came to fruition. FCF for 2018 increased 32% y-y to $1.7bn (3.7% yield). Commentary regarding Praxair’s pending merger with Linde suggests that the deal is on track with closing expected prior to October 2018.
• 1Q18 guidance reads positive; 2018 tax rate in line with our forecast. For 1Q18, Praxair expects EPS in the range of $1.53 to $1.58, which is essentially in line with our $1.55E, and better than consensus of $1.53. In a break with the company’s historical convention, Praxair did not put forth an EPS range for the full year. However, earnings guidance for 1Q18 appears constructive and the expected tax rate range of 23-25% is essentially in line with our forecast rate of 24.1% as revised for the new US tax regime. Pending commentary on the company’s conference call this morning, our $6.60E for 2018 seems reasonable or perhaps conservative...
• North America posted impressive volume. Sales volumes of 8% accelerated sharply from the 3% y-y growth pace witnessed in 3Q17. Praxair cited strong volumes along the US Gulf Coast as well as improvement in the sale of packaged (cylinder) gases, partially offset by a “slow recovery” in Puerto Rico. In terms of end-use markets, energy, manufacturing, chemicals and electronics led the way. Acceleration of growth is encouraging given the continued economic momentum, though comps will now become increasingly difficult...
• Asia in line despite strong sales. Sales in Asia were $470mn, up 19% y-y, and well ahead of the $452mn we had anticipated. However, EBIT was largely in line with our expectation at $90mn as margins in the Asia segment continue to be a source of relative weakness vs. our forecast; missing our mark by 110bps and finishing down 60bps y-y. Volumes of 11% continue...
• Europe and South America combine for a marginal tailwind. Together, these two segments represented a combined $5mn beat, or about $0.01 tailwind in EPS terms, relative to our forecast. Volume growth in Europe continues to chug along in the mid-single digit range, while South America shows further signs of stabilization...
• We rate PX shares Hold with a price target of $151. Our target suggests shares offer limited upside, including a dividend yield of 2.2%. As a reminder, we value PX based on an average of our DCF analysis and a relative P/E-based framework. Our DCF analysis suggests a warranted stock price of $121, and includes a weighted-average cost of capital (WACC) estimate of 7.8% and a terminal growth rate of 2.5%. Our relative P/E-based framework indicates a warranted value of $146 per share based on a 17.5% premium to the S&P500 index’s multiple as applied to our 2018 EPS estimate of $6.60. Finally, we continue to attribute additional value of $17 per share to reflect the expected value to be created from Praxair’s pending MOE with Linde.
(Please see full report for details)
