Unless you work at a party store, there's a fair chance you haven't heard about the helium shortage.
Helium is abundant in the universe, but it's so light that we can't just pull the tiny molecules out of the air. Instead, they're pulled out of the ground as a by-product of select natural gas fields. The worldwide helium supply and demand balance is quite tight, and the most significant historical source, a U.S. government stockpile outside Amarillo, Texas, is dwindling. So, when it comes to divvying up the noble gas, party balloon purveyors take a backseat to the needs of NASA and the health-care industry.
This under-reported shortage, plus a recent disruption over at Suncor (NYSE: SU), got me wondering about the business of industrial gas supply. In this country, there are just a few key operators. Conveniently enough, they've all recently reported financial results, so it seems an ideal time to kick the tires.
The little distributor that could
While it's by far the smaller of the two companies we're peeking at today, Airgas (NYSE: ARG) has completed more than 350 acquisitions over its 25-year history. You've got to imagine there's someone ambitious at the helm of this M&A monster. Indeed, one of the first things I noticed here is that the company's founder steers the ship to this day, and he owns a great big piece of the business. So far, so good.
Airgas primarily sells "packaged" gas, meaning that products like hydrogen, nitrogen, and helium are delivered in cylinders or less-than-truckload bulk quantities. The company is tops when it comes to nitrous oxide (go ahead and laugh) and dry ice. It also distributes welding supplies and safety products, which add a little heft to the product line.
This is a wonderfully diversified business -- no customer accounts for more than 0.5% of sales. Since Airgas doesn't have to disclose any significant customers, it's not possible to say whether its CO2 makes it into that bottle of Jones Soda (Nasdaq: JSDA) you've got sitting in your fridge. Or whether it provided the coolant in your fridge, for that matter. Suffice it to say that Airgas' products are necessary, and they are ubiquitous.
So how's business? With the recent quarter's 39% growth in operating income, things look pretty darn good. Remember, though, that acquisitions play a key role in the growth story here. Airgas' same-store sales metric clocked in at 7%, which is solid, but no supernova.
After surveying the company's financial history, I have to conclude that Airgas' track record is good, but it doesn't stand out from its larger peers. Return on equity fell into the single digits several times over the past decade, and for that reason I'm not sure it's the best place for my specialty gas distribution dollar.
The Danbury dynamo
Maybe I'm biased in my preference of Praxair (NYSE: PX) because the firm hails from my hometown in Connecticut. But this heavyweight possesses many of the features I like about Airgas and does them one better.
Take the diversification angle, for example. Praxair, as an integrated distributor, not only sells packaged gases, but employs on-site and merchant liquid distribution methods as well.
Only the most intensive gas consumers require on-site production. An example is the hydrogen plant that Praxair is building at Chevron's (NYSE: CVX) Richmond refinery in Northern California. Such orders usually provide a decade or two of contracted supply to the customer, with price escalation provisions for Praxair.
The merchant business sends out liquefied argon, helium, and other gases in those big tanker trucks that you probably keep the heck away from when you see them on the highway. Merchant gases are often purchased by those regional packaged gas distributors that Airgas loves to acquire.
In addition to its distribution methods, Praxair is also significantly more diversified geographically. North America accounts for only about half of sales, so the company, like a General Electric (NYSE: GE) of gases, is much more heavily exposed to global infrastructure spending. Then, of course, there are the benefits of the busted dollar. Currency effects played no small part in the company's 13% sales growth in 2007.
Still, Praxair isn't immune to a U.S. recession, and it explicitly tied the lower range of its 2008 earnings guidance to a slowdown scenario. At 10% growth, you've got to admit that's a pretty cozy catastrophe. It certainly helps that the company has a record backlog of 42 large projects.
Between its consistent long-term profitability, balance sheet health, and dividend growth, this company's financial track record is remarkable. I just wish Praxair's valuation didn't reflect its very high quality.
