Airgas has plenty left in the tank

10/20/2008


  Recent Price
$38
  Dividend
$0.48
  Yield
1.3%
  P/E Ratio
13
  Shares (millions)
85
  Long-Term Debt as % of Capital
50%
  52-Week Price Range
$65.45 - $33.21

So far, economic weakness hasn’t slowed down Airgas ($38; NYSE: ARG). The distributor of packaged gas delivered per-share-profit growth of 37% and sales growth of 26% in the 12 months ended June. Free cash flow more than doubled.

The combination of an aggressive acquisition strategy and solid internal expansion is driving the impressive sales and profit gains. Consensus estimates project per-share-profit growth of 26% in fiscal 2009 ending March and 13% in fiscal 2010. Airgas was upgraded to a Focus List Buy earlier this month.

Competitive advantages
Several factors differentiate Airgas from the competition and inspire optimism about the future:

Size: Airgas is the largest U.S. distributor of packaged gases. It is also the largest producer of nitrous oxide, the third-largest supplier of liquid carbon dioxide, and the top distributor of dry ice. With strong cash flow, Airgas has the flexibility to continue expanding through acquisitions.

Market power: Airgas controls more than 25% of its highly fragmented market and is poised to keep gaining share. The acquisition of more than 375 companies since 1986 has broadened Airgas’ distribution network and created cross-selling opportunities to existing customers.

Diversification: The company serves more than 800,000 customers in markets ranging from manufacturing to agriculture to pharmaceuticals. This broad customer base provides some protection from downturns in any one area.

Reach: Airgas operates 1,100 locations in the U.S., Canada, and Mexico and also sells through catalogs.

Business breakdown
Airgas’ core business — the distribution of industrial and medical gases, products used for welding, and process chemicals — generated 83% of sales in fiscal 2008 ended March. The remaining 17% of revenue came from dry ice and such specialty gases as carbon dioxide and nitrous oxide.

Strategic products — which Airgas defines as those growing faster than the overall industrial economy — make up about 40% of revenue and deliver roughly 10% annualized sales growth. The company focuses much of its research efforts on the strategic markets, which include health care, environmental, and food and beverages. Also key to growth are efforts to boost marketing to small and midsized customers.

Much of Airgas’ recent operating success stems from strength in the energy, petrochemical, and metal-fabrication markets. Airgas expects energy production and infrastructure construction to remain strong in the year ahead, supporting solid demand for industrial gases.

Raw-material costs are on the rise, but Airgas has increased prices to offset those expenses, with minimal effect on sales so far. Management is also working to fatten the bottom line through efficiency improvements.

Conclusion
At 11 times estimated year-ahead earnings of $3.45 per share, Airgas trades below its five-year average forward P/E of 16. The company is scheduled to release September-quarter earnings Oct. 23. An annual report for Airgas Inc. is available at 259 N. Radnor-Chester Road, Suite 100, Radnor, PA 19087; (610) 687-5253, www.airgas.com.


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