Praxair to Benefit From New Order Wins Despite Rising Costs

On Aug 31, we issued an updated research report on Praxair, Inc.PX . The company is poised to gain from strong backlog, new order wins and focus on disciplined capital-allocation process. Nevertheless, sluggish economic conditions in Brazil, currency headwinds and rising costs might impede the company's near-term growth.

Let's illustrate the factors in detail.

Praxair to Gain from Disciplined Capital Allocation

Praxair is gaining from multiple initiatives including pricing cost management, prudent investments in the project backlog. As a result of its disciplined capital management and cash focus, the company posted after-tax return capital of 13.6% during second-quarter 2018. Praxair expects it to continue to improve throughout 2018. Further, the company remains committed toward rewarding its shareholders with dividends and share buybacks. Praxair paid dividends of $237 million and cut down its net debt by $318 million during the June-end quarter.

Strong Backlog & New Order Wins to Aid Results

Praxair posted solid backlog growth in second-quarter 2018. The company won three new onsite projects and started work on the China National Offshore Oil Corporation project during the reported quarter. It expects to win new on-site business opportunities, especially in the U.S. Gulf Coast. Additionally, Praxair has more than 30 small on-site project wins, totaling $80 million in investment, which will likely begin in 2019.

Sluggish Economic Conditions in Brazil a Woe

Praxair's performance in the South American segment continues to lag the rest of the world due to sluggish economic conditions in Brazil. During the second quarter, the manufacturing end market was weak due to a nationwide Brazilian trucker strike that led to a negative 7% year-over-year industrial production rate in May 2018. Results in the regions will likely remain affected in the near-term mainly due to the strengthening of the U.S. economy, along with global trade concerns and political uncertainty, which will continue through second-half 2018.

Currency Fluctuation a Threat

Praxair witnessed a 10% year-over-year currency headwind during the second quarter due to significant devaluations of the Argentine peso and Brazilian real led by political concerns. Based on the recent forward rates, the company expects to experience translational currency headwinds of 2-4% during the second half as the U.S. dollar continues to strengthen from higher interest rates and a stronger economy.

Rising Costs to Hurt Margins

Praxair expects that helium supply will remain strained in the near future due to certain source outages which will impact margins. Further, rising freight and logistics costs remain a concern.

Share Price Performance

Over the past year, Praxair has outperformed the industry with respect to price performance. The stock has gained around 21%, while the industry recorded growth of around 5% during the same time frame.

Zacks Rank & Key Picks

Praxair currently carries a Zacks Rank #3 (Hold).

Better-ranked stocks in the same sector include Celanese Corporation CE , Huntsman Corporation HUN and Air Products and Chemicals, Inc. APD . While Celanese and Huntsman sport a Zacks Rank #1 (Strong Buy), Air Products carries a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank stocks here .

Celanese has a long-term earnings growth rate of 10%. The stock has rallied 19% in a year's time.

Huntsman has a long-term earnings growth rate of 8.5%. Its shares have gained 13% in the past year.

Air Products has a long-term earnings growth rate of 16.2%. The company's shares have been up 14% over the past year.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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