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Airgas Has Its Feet on the Ground
03/15/2007 12:00 am EST
Vahan Janjigian, editor of the Forbes Growth Stock Investor, uses a quantitative model to pick stocks. He says gas distributor Airgas should continue to do well as manufacturing and non-residential construction remain strong.
Airgas (NYSE: ARG , $41.34) is a distributor of industrial, medical, and specialty gases, as well as welding equipment and safety products. The company sells products at more than 900 locations through a network of production facilities, specialty gas labs, distribution centers, branches, and retail stores. ARG serves manufacturing, construction, medical, food, petrochemical, and other industries.
Distribution accounted for 82% of sales in the first nine months of fiscal 2007, [which ends March 31]. Airgas distributes gases such as nitrogen, oxygen, carbon dioxide, and hydrogen, [as well as] welding gases and ultra-high-purity gases. It delivers its product primarily in cylinders, but it also sells in bulk and accommodates onsite pickup.
[The rest of Airgas' revenue came from] gas production. The company is the largest North American supplier of nitrous oxide, and among the leading suppliers of dry ice, liquid carbon dioxide, refrigerants, and ammonia. This segment also contains ARG's National Welders Supply Company, a joint venture that produces and supplies gases through six air separation units (ASUs). The purchase of Linde AG's bulk gas assets (which consist of eight ASUs) should close in the current quarter, enhancing this business.
ARG has benefited from favorable trends in non-residential construction, industrial production, and energy markets. The top line is also getting a boost from acquisitions. Including Linde, ARG will have acquired 12 companies in the past year with cumulative annual sales above $325 million, helping revenues rise 12% in the fiscal third quarter.
Gross profit margins improved 95 basis points to 47.15%. And despite higher selling, general and administrative (SG&A) expenses, operating profit margin grew 102 basis points to 10.84%. Adjusted net income from continuing operations climbed 30% to $40.3 million, or 50 cents per share.
Fiscal fourth-quarter same-store sales growth will trend lower due in part to falling fuel surcharges and shortages of argon and helium. The helium shortage, in particular, had a negative impact on Valentine's Day volumes, yet management increased earnings guidance. The Linde acquisition should help boost the company's overall profit margins. Additional acquisitions are likely, which should further boost sales and earnings.
Recent economic data such as manufacturing and mining activity bode well for ARG. In addition, the private non-residential construction market continues to exhibit strong growth. These trends should result in stronger than expected results from ARG.
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