We believe that Airgas (ARG; recent price, 59) will continue to experience improved results due to above-average sales growth resulting from the company's leading market share of the U.S. gas distribution market, as well as continued demand from customers in energy, infrastructure, medical, and other markets. In addition, we think Airgas will continue to consolidate, and expect targeted acquisitions in the U.S. and internationally to help boost both revenue and earnings. We also believe Airgas, with more than 800,000 customers, will continue to experience growth despite a slowing economy, due to its fairly broad and diversified revenue base and its exposure to growing end markets, including the energy, infrastructure, and medical industries.
We view Airgas' valuation as compelling relative to historical trading multiples, its peer group, and growth prospects. The stock carries Standard & Poor's highest investment recommendation of 5 STARS, or strong buy.
COMPANY PROFILE
Pennsylvania-based Airgas was founded in 1982 by Peter McCausland, Airgas' current chairman and CEO, and has grown organically and through acquisitions. The company has completed more than 375 industry-consolidating acquisitions and has built the largest industrial gas distribution network in the U.S., with more than 1,000 branches. Airgas has a fairly broad exposure to the overall U.S. economy, by our analysis, serving more than 800,000 customers in multiple industries, including industrial manufacturers, welders, scientific, and other medical research, the food industry, the medical industry, infrastructure, energy, and the transportation industry. The company operates through two segments: distribution and other.
The distribution segment comprised 83% of total revenue for fiscal 2008 ended in March, and had operating margins of 11.6%. The segment purchases industrial, medical, and specialty gases, process chemicals, and hardgoods for resale to numerous customers. Gas sales include nitrogen, oxygen, argon, helium, hydrogen, welding and fuel gases, propylene, propane, carbon dioxide, nitrous oxide, and other gases. In addition, Airgas also earns rental income on gas cylinders, cryogenic liquid containers, bulk storage tanks, and other equipment. Outside of gas, Airgas sells various hardgoods such as welding consumables, safety products and equipment, and maintenance and repair supplies.
The other operations segment comprises 17% of fiscal 2008 revenue, while segment operating margins were 10.5%. Segment operations consist of three businesses: gas operations, Airgas Merchant Gases, and National Welders. The gas operations segment primarily produces and distributes carbon dioxide and dry ice used in the food service and medical industries. Airgas Merchant Gases is comprised of Linde's divested U.S bulk gas business, acquired in March 2007, and is primarily involved in the production and distribution of various bulk and industrial gases across the U.S. National Welders is a producer and distributor of industrial gases serving customers primarily in the Southeast U.S.
INDUSTRY BACKGROUND
The worldwide market for industrial gases is about $40 billion a year, with the U.S. market alone at $13 billion. Multiple industries are served by industrial gas producers and distributors. These include general industrial manufacturers, welders, medical and scientific research facilities, medical facilities, food processing and storage companies, transportation, and various energy and infrastructure-related industries. There are three basic distribution methods for industrial gases: on-site plants, bulk (merchant) supply, and cylinder (small volume packaged gas). Most of the industrial gases producers, along with Airgas (the largest distributor) and a large number of independent companies, also serve the packaged gases market.