What do the party supplies, healthcare, and metal fabrication industries all have in common? They rely on helium companies. Tantamount to much more than being bullish on balloons, an investment in helium is one that recognizes the vital role the element plays in everything from testing automotive parts, to manufacturing semiconductors, to cooling the superconducting magnets used in MRIs.
With helium found in a variety of applications, demand for the element continues to rise; however, finding an adequate supply is far from simple. Even though it is the second most abundant element in the universe, helium is rather scarce on Earth. Consequently, companies adept at producing and distributing the element represent worthy considerations for investment, so let's take a look at two of the most compelling opportunities for investors: Praxair (NYSE:LIN) and Air Products & Chemicals (NYSE:APD).
Ready player No. 1
Founded in 1940, Air Products & Chemicals has a long history in the industrial gases business. In terms of helium, though, Air Products can trace its leadership back to the 1950s, when it built the first cryogenic system for extracting helium from natural gas. Shortly thereafter, in the 1960s, the company further proved its leadership by developing the industry's first coiled wound heat exchangers for the helium industry.
With operations in more than 50 countries, Air Products maintains a well-diversified customer base. Although this has the benefit of mitigating risk, it also means the company is subject to foreign currency headwinds -- headwinds that may skew the company's earnings. For example, revenue dropped approximately 4% from fiscal year 2015 to fiscal year 2016 thanks in large part to currency exchange. According to the company's fiscal year 2016 10-K, foreign currency headwinds adversely affected sales 3%.
Proving that the company is prospering despite the currency headwinds, Air Products reported significant margin expansion in fiscal year 2016. Operating margin, for example, climbed 400 basis points year over year to 23.1%, and EBITDA margin grew 420 basis points to 34.4%. These expanded margins, in turn, translated to net income of $1.65 billion for fiscal year 2016 -- a 15% increase over the $1.43 billion reported in fiscal year 2015. Of course, some investors -- well aware of how companies can "massage" income statements and arrive at misleading earnings figures -- may be skeptical of Air Products' bottom-line growth. But a glance at the company's cash flow reveals how the company's reported success isn't just a lot of hot air. According to Morningstar, Air Products more than doubled its free cash flow in fiscal year 2016; whereas it reported $823 million in fiscal year 2015, the company reported $1.65 billion last year.
Besides industry leadership, corporate culture is an important consideration when weighing the merits of investing in a company. Herein Air Products has earned high praise, further suggesting its value. For the sixth consecutive time, Corporate Responsibility Magazine named Air Products to its list of 100 Best Corporate Citizens in 2017. Further illustrating its leadership, Air Products was named to the Dow Jones Sustainability North America Index 2016/7, signifying its rank among the top 20% of companies in its industry for corporate sustainability performance.
Ready player No. 2
Having developed the first plant for extracting helium from natural gas in 1917, Praxair has emerged as an industry leader in the production and distribution of the gas, but the company's business is much more diverse than just dealing in helium. In fact, Praxair's primary businesses are in the manufacturing and distribution of process gases -- carbon dioxide, hydrogen, electronic gases, specialty gases, and acetylene -- and atmospheric gases: oxygen, nitrogen, argon, and rare gases.
|Company||Market Cap||FY 2016 Revenue||FY 2016 Earnings per Share||FY 2016 Return on Equity||Dividend Yield|
|Air Products & Chemicals||$31.3 billion||$9.52 billion||$2.89||8.81%||2.45%|
|Praxair||$37.7 billion||$10.53 billion||$5.21||31.88%||2.30%|
Similar to Air Products' geographically diversified customer base, Praxair also operates in more than 50 countries, subjecting the company to currency headwinds. For example, in fiscal year 2016, Praxair reported revenue of $10.5 billion, which was approximately 2% lower than the $10.8 billion it reported in fiscal year 2015. In the company's 2016 10-K, management noted that "negative currency impacts" reduced sales by 3%. The company's success in generating free cash flow, on the other hand, provides a simpler illustration of how well the company is performing. In fiscal year 2016, Praxair reported an all-time high of $1.3 billion in free cash flow -- a 14.6% increase year over year.
Generating a record amount of cash is enough to make most investors happy, but Praxair's decision to increasingly return that cash to shareholders is enough to make nearly all of its investors smile.
Management has demonstrated a steadfast interest in maximizing shareholder value by both reducing the stock's share count and raising its dividend over the past 10 years, and looking ahead, there's little -- if any -- to suggest that this will change.
Like Air Products, Praxair has also distinguished itself in terms of corporate culture. Earlier in May, the company reported that Forbes named it to its list of the 500 Best American Employers -- a distinction Praxair has received each year since the list's inception in 2015. Forbes isn't alone in lauding Praxair's accomplishments. The Human Rights Campaign named Praxair to the 2017 Corporate Equality Index, awarding the company with a perfect score of 100.
For investors interested in gaining exposure to the helium industry, both Air Products and Praxair are certainly compelling opportunities. Requiring considerable production and distribution facilities, the helium business isn't one that business owners can capriciously jump in to, which suggests Air Products and Praxair retain considerable competitive advantages in that they already maintain the necessary infrastructure.
Looking ahead, Praxair's industry leadership is poised to grow even more substantial as it's currently in the process of acquiring another industry leader, Linde AG, for approximately $35 billion. According to Praxair's press release on the deal, when completed, the transaction is expected to result in "approximately $1 billion in annual synergies, driven by scale benefits, cost savings and efficiency improvements." This isn't to suggest that Air Products is falling by the wayside, though; the 2015 deal it signed with RasGas Company Ltd. for the Helium 3 plant at the Barzan facility in Ras Laffan Industrial City, Qatar, illustrates how the company remains at the forefront of the industry. By some estimates, when the facility becomes operational in 2018, Air Products will become the world's largest commercial supplier of helium.