A 71% Gain in 18 Months… The Hidden Value in Airgas

by David Fessler, Energy and Infrastructure Expert
Friday, August 6, 2010: Issue #1318

It was Halloween 2008 when I penned an Investment U article entitled: “This Company’s on Fire.”

The company I referred to was Airgas, Inc. (NYSE: ARG). And far from being a nightmare of a stock pick, it’s blasted 71% higher since then.

Airgas is the largest distributor of packaged medical, industrial and specialty gases in the United States. It’s also the largest producer of CO2 (both liquid and gas), dry ice (frozen CO2) and nitrous oxide (more commonly known as laughing gas).

As such, the company plays a huge role in the energy and infrastructure sectors – both of which are right up my alley.

If you purchased shares after reading my article, you’d be laughing – even without the nitrous.

It was a no-brainer back then – and it still is today…

Airgas: From “Mom-and-Pop” to a $4 Billion Powerhouse

Before Airgas came along in 1982, the specialty gas distribution business was made up largely of “mom-and-pop” operations.

And while the company has experienced some organic growth, its primary growth strategy is simple: Build up by buying out.

One by one, Airgas started acquiring the smaller names in the business. Twenty-eight years later, it’s absorbed nearly 400 of them. Airgas is now the largest U.S. gas distribution network, boasting more than 14,000 employees.

During its fiscal year 2010, which ended in March, the company chalked up almost $3.9 billion in revenue. It would have been more, but a slowdown in industrial activity shaved $500 million off its 2009 revenue figure.

But make no mistake: Airgas is a moneymaking powerhouse. Its revenue has swelled at a compounded annual rate of 19% over the past five years.

And despite that drop in 2010 revenue, net income only decreased $67 million from the prior year, which prompted a change of heart from management…

Airgas’ 180-Degree Strategic Turnaround

With Airgas on top of its costs, the company was able to scale back its operations accordingly. But with second quarter revenue up 7%, as industrial customers began ramping up their expenditure again, Airgas did a 180-degree turn.

The news was a signal that the company had not only weathered the recession, but actually turned higher. But it also has lots more room to run.

You see, even though Airgas has already acquired nearly 400 of its competitors, there are over 900 specialty gas distributors in the United States still out there. And they’re all potential takeover targets for Airgas.

Battle of the Air Giants

Airgas’ success isn’t lost on its main competitor – Air Products & Chemicals, Inc. (NYSE: APD). In fact, it’s tried to buy Airgas no less than three times.

In an ironic twist, Air Products sold its specialty gas business to Airgas eight years ago when it was in disarray. Now it wants it back.

But for want of a better expression, Airgas chairman and CEO Peter McCausland (who also founded the company back in 1982) told Air Products to take its offers and “shove ‘em.” Especially when he found out that the company’s law firm, Cravath Swain & Moore, was also working for Air Products. (That’s clearly a breach of fiduciary responsibility.)

In its August 4 letter to shareholders, Airgas’ Boardhas unanimously rejected Air Products’ revised $63.50 per share offer after determining that it grossly undervalues Airgas and is not in the best interests of Airgas stockholders.”

Lawsuits are flying in several directions, but in the end, Airgas will likely remain its own entity. And why wouldn’t it? Let me tell you…

Airgas: There’s Still Time to Buy This Blazing Stock

Another part of Airgas’ letter to shareholders stated: “In our view, the economic recovery in the United States is just beginning. Conditions in most of our customer segments and geographies continue to improve, and we expect Airgas’ momentum to increase with the economic expansion.”

In my view, Airgas is poised for explosive growth and its acquisition department will be busy for the remainder of the year. In addition, the company just announced a 14% increase in its quarterly dividend payment – to $0.25 per share. That puts its annual yield at 1.5% and extends the company’s streak of having raised dividends every year since it started paying them in 2003.

But the real future value in Airgas shares is hidden in the value of the companies (privately held ones) it has yet to acquire.

Bringing additional revenue and profits on board could easily see Airgas double in size over the next three to five years, giving shareholders another boost, too.

And there’s always a chance that Air Products will come back with a buyout offer so sweet that even CEO McCausland might cave and sell the company.

Either way, it’s a win-win situation for Airgas shareholders. So if you bought it back on Halloween in 2008, it’s a great time to add to your position.

If you don’t yet own Airgas, don’t wait until this Halloween to buy some. You’ll be scared silly when you see how far the stock has appreciated by then.

Good investing,

David Fessler