In the Investment Comments section of January 2012’s Investor Advisory Service, we noted that the U.S. employment picture was starting to improve. The most recent jobs numbers estimated that the unemployment rate had come down from 9.0% to 8.6% in late 2011. We won’t spend time grumbling about what constitutes “progress” nowadays, but simply note that the stock market went into 2012 on an absolute tear. The S&P rallied 13% in nearly a straight line from January through early April. The index has seesawed since then and currently trades right around those April highs.
Each month, we pick three stocks to highlight. Sometimes we introduce new stocks to the newsletter. Sometimes we go back and revisit our old favorites. One of our highlighted companies in January 2012 was Praxair (Ticker: PX), a company we’ve been following since 1997.
Praxair is a large company but is far from being a household name. The company’s market, industrial gasses, constitutes a crucial input for manufacturing and chemicals companies, as well as many energy producers, food companies, and even hospitals. That sounds like a recipe for inconsistent, cyclical performance, but Praxair has produced steady sales and earnings growth historically. The company’s contracts are tied to overall volumes of production, rather than volatile commodity spot prices. An oil refinery, for example, will see the prices of both oil and finished fuels fluctuate wildly. The refinery will make a profit one month, then a loss the next month. In contrast, the gas Praxair supplies to the refinery goes for a flat rate. As long as the refinery is busy, Praxair’s revenue is reliable.
Historically, that reliable growth has caused shares to trade at a high valuation. We’ve been steady proponents of buying on pullbacks. Late 2011 presented such an opportunity, so we put the company in front of our subscribers for consideration. Shares have increased 5% since then, or 7% including dividends. That lags the broader market during the same timeframe. We still like the shares.
Praxair’s performance during the past twelve months reflects the strength of the company’s business model in the context of slowing worldwide growth. We like the company’s global footprint, which normally helps to even further reduce overall volatility. A diversified revenue base doesn’t guarantee strong results, however. Many emerging industrial economies slowed during 2012. Let’s take a look at Praxair’s results quarter-by-quarter.
Q4 2011 results, which the company reported in February 2012, came with some words of caution. Currency effects were starting to produce headwinds to reported growth, as opposed to tailwinds the year before. Asia and Latin America came in below historical norms, but management expected both markets to bounce back quickly. Overall sales growth of 7% was below the established trend, but still adequate. Shares rallied from $104 at the time of our profile to $110. They would peak at $117 at the beginning of May.
In the same month, Q1 2012 results kicked off a trend of slower growth. Sales increased 5%, and EPS increased 7%. Investors expressed their displeasure by sending shares down 13% in a generally weak market. Shares have bounced between about $104 and $110 ever since. Q2 actually showed a year-over-year 2% sales decline. Currency was a big drag during the quarter. Some newly-finished projects laid the foundation for better results in the future, but Q3 didn’t reflect much contribution. Sales declined 4%, a very unusual amount of softness for this company. One bright spot was North America, where 4% organic sales growth produced a 10% increase in operating profit. The company will report its fourth quarter in February 2013, but management has already put forward some early financial guidance and expects double-digit profit growth, with single-digit sales growth in 2013. If those numbers do materialize, and this company typically delivers on its promises, shares could start climbing again.