Airgas: Diversification and Expansion Are CatalystsARG) shares are down over 17% this year as the company’s recent financial results haven’t impressed. For instance, last quarter, Airgas reported revenue of $1.35 billion, up 3% from the prior-year period. But, its earnings per share fell 2% from last year on the back of challenging global economic conditions and currency fluctuations. However, Airgas is a relatively stable performer as the company has emerged stronger through economic cycles due to its gas & rent revenue stream.
The gas company also has a solid balance sheet with investment grade credit ratios and no major post-retirement or contingent liabilities.
Focusing on the growth prospects
Airgas is expanding its year-over-year sales by diversifying its gas supply operations and including various markets such as the U.S. packaged gas market, the hardgoods market and the strategic products market comprising of safety products, bulk gas, medical sales, CO2/dry ice, and specialty gas.
The strategic accounts program of Airgas is a significant competitive advantage for the company, designed to offer advanced service to major customers with several locations. This program includes integrated supply chain management solutions designed according to the customer’s requirements, which delivers notable supply chain savings and a smaller net cost of ownership.
Due to its diversity, Airgas reported 2% growth in organic sales compared to last year, with rent and gas increasing 5% and hardgoods declining 3%. For the distribution segment, sales from continuing operations remained flat as against the previous year, with rent and gas growing 2% and hardgoods declining 3%. In the other operations segment, organic sales grew 16%, led by superior sales in the dry ice, CO2 and refrigerants businesses. Acquisitions contributed 1% to the sales growth during the quarter in both the Distribution segment and on a consolidated basis.
The well-planned accounts program of Airgas is driving significant customer traction for the quarter and thus expanding both organic and inorganic sales growths for the company. Since the start of the fiscal year through July 27, Airgas has uniquely acquired nine businesses having total yearly sales of about $74 million that includes the nitrogen services business of Priority Energy Services, LLC and industrial gas and welding supply distributor Weldinghouse, Inc.
The gas major is extremely focused on diversifying its business operations through the planned acquisitions of nine key indentified businesses, enabling it to maintain a cash-rich balance sheet and thus delivering enhanced shareholder returns.
More buybacks on the way
Airgas is known for returning a lot of cash to shareholders through buybacks and dividends, while it is also using its cash flow to reduce debt. The company recently repurchased all $250 million of its remaining 3.25% Notes maturing in October 2015.
Airgas had announced $120 million of free cash flow last quarter, an increase of 15% as compared to last year, and adjusted operating cash flows of $232 million, an increase of 13% as compared to the last year. During the first quarter, Airgas bought back 1 million shares through open market operations for approximately $104 million and at an average price of nearly $103.84 per share.
Airgas’ performance on the stock market might not have been very good so far this year, but the company is making the right moves in order to get better. The company is diversifying its business and this is a good thing to do since it will be able to tap different end markets going forward. Hence, in my opinion, investors should consider using Airgas’ drop as an opportunity to build their position for the long run.
Published on Sep 19, 2015By Yaggyaseni Mittra