Praxair, Inc.PX

The industrial gas industry has consolidated significantly since the late 1990s, with the top four players now controlling nearly 80% of the market. We think this more favorable industry dynamic should limit the overcapacity that caused prices to plummet during the last downturn.

Praxair is currently the market leader in North America and it also dominates South America with an estimated 65% of the Brazilian industrial gas market.

Praxair leads the industry in operating profit per employee. Since 2004, the firm has delivered 10% more operating income per employee than its peers. Read more 

Praxair said the internal rate of returns in its backlog has dipped to 15% per project from 18% a few years ago. Although still impressive, we think these lower returns indicate stiffer competition, specifically in the emerging markets, since this is where the bulk of the backlog resides.

Increasing competition in China and India will represent major obstacles for Praxair's growth. Sales growth and operating margins are contingent on expanding its U.S.-type operations overseas. Any inability to replicate those operations will hurt sales growth and compress margins.

Praxair noted that the construction period for large-scale onsite projects has increased over the last decade by at least a year or two. This has the potential to put a greater strain on cash flows, and result in lower project returns. Read more