Helium Shortage Inflating Profits of Industrial Gases Companies
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There has recently been a surge of coverage in local media outlets about a nationwide shortage of helium. The coverage has focused on the impact that higher prices have on consumers of helium, such as florists, welding companies, and university science departments.
On the other side of the story are the providers of helium that seek to balance the rising cost and delays in supplies of helium with the potential for improved sales and profits. Although major energy companies like ExxonMobil and BP dabble in the helium market, investors may want to look at three companies that are more heavily invested in the production and selling of helium. They are Airgas, Inc. (NYSE: ARG), Praxair, Inc. (NYSE: PX), and Air Products & Chemicals, Inc. (NYSE: APD).
According to the most recent update from the US Geological Survey (USGS) from December 2011, production of helium and stocks of helium held by the U.S Bureau of Land Management have declined annually by 3.4% and 5.9%, respectively, since 1998. In nominal terms, the price of helium in the U.S. has risen by 1.4% annually since 1998 driven by dwindling stocks offset only partially by reduced production. Furthermore, as a share of worldwide production, U.S. production has declined to 46% from 85% in 1998. This trend is expected to continue as the USGS predicts that future sources for world helium supply are more likely to come from international helium extraction facilities. Seven international helium plants are now in operation and more are planned for the next three to five years.
Airgas is the largest U.S. distributor of industrial, medical and specialty gases, including helium. Praxair is the largest industrial gases company in North and South America, and Air Products is the world’s largest producer and supplier of liquid and gaseous helium. By market capitalization, Praxair is the industry leader at about $31 billion while Air Products is second at about $16.7 billion and Airgas is the smallest at about $6.5 billion.
Current consensus EPS estimates indicate that at a recent share price of $77, Air Products has the lowest forward P/E multiple at 12.1x compared to 17.4x for Airgas at a recent $84 per share and 15.4x for Praxair at a recent $102 per share. The lower multiple for Air Products is less attractive when estimated earnings growth is included. Analysts see earnings growing by about 5.2% through fiscal 2013 compared to an estimated 17.4% for Airgas and 10.6% for Praxair. The price to earnings to growth (PEG) multiples for 2013 are 2.3x for Air Products, 1.5x for Praxair, and 1.0x for Airgas, indicating Airgas is the better value at current prices should growth estimates be realized. Because Airgas has the highest historical revenue and EPS growth of the three companies, I am comfortable with estimates that its growth will be the highest of the group and therefore that forward PEG is the most attractive.
Air Products is the most significant player in the helium market and its dividend yield, currently at 3.3% after being increased by more than 10% in 2012, is higher than both Praxair and Airgas at 2.2% and 1.9%, respectively. Despite these factors, Airgas is the most compelling stock in the group with better growth prospects and a more favorable PEG ratio.
As the world’s largest producer and supplier of helium, Air Products has greater exposure to the supply and demand dynamics of helium than its two U.S. competitors. In its second quarter 2012 conference call, Air Products’ management indicated that it does not expect its new helium plant to be operational in fiscal 2012 (ended September 2012) because it is still awaiting feedstock from a supplier. Although this operational delay resulted in lost sales, the company was quick to note that demand was ready to absorb additional supply and that pricing has improved in the U.S., Europe, and Asia.
The helium market has undergone significant worldwide supply and demand shifts since the Helium Privatization Act of 1996, which directed that the National Helium Reserve be liquidated. And more market changes are forthcoming with the mix of worldwide production shifting away from the United States. Also, the extraction of helium is becoming less economically feasible as natural gas prices decline because the only way to access helium is to tap into natural gas deposits first and recover helium as a residual activity. Lower natural gas exploration activity caused by lower prices leads to less helium extraction and supply.
For investors seeking a direct helium play, Air Products is the largest player and it offers a rising dividend. However, its share price is currently unattractive and I would instead be a buyer of Airgas to gain helium exposure. Air Products may have had the same thought back in late 2010 when it made an offer to purchase Airgas at $70 per share. Airgas investors have been fortunate that the deal was not completed with their shares rising by 20% since that time while Air Products shares have declined by almost 7% since the offer was withdrawn in February of 2011.
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