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How Has Praxair Consistently Improved Its Free Cash Flow?

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Higher free cash flow

Praxair (PX) significantly improved its FCF (free cash flow) from $0.5 billion in 2010 to $1.2 billion in 2014. FCF growth was primarily driven by higher OCF (operating cash flow) and partially offset by increased capex. Praxair’s OCF for 2014 rose impressively to $2.9 billion from $1.9 billion in 2010, led by strong earnings. Driven by solid operating performance, the company’s net profit for 2014 increased to $1.7 billion from $1.2 billion in 2010. However, Praxair reported a higher capex of $1.7 billion, compared with $1.4 billion in 2010.

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Improved liquidity

Praxair’s liquidity has also improved significantly, rising from $1.3 billion in 2010 to $2.6 billion in 2014. This was primarily due to an increase in credit facilities from $1.2 billion in 2010 to $2.5 billion in 2014. Cash and cash equivalents also improved significantly, rising to $126 million in 2014 from $39 million in 2010. The company’s current ratio, another important short-term liquidity measure, was 1.1 in 2014 and has almost been constant.

Free cash flow comparison

Praxair has generated free cash flow of $1.0 billion in the last twelve months. Its closest peers Air Products and Chemicals (APD) and Airgas (ARG) reported relatively lower free cash flows of $0.8 billion and $0.2 billion, respectively. The Dow Chemical Company (DOW) and DuPont (DD) generated free cash flows of $4.0 billion and $1.7 billion, respectively, in the last twelve months. Praxair’s free cash flow yield of 3.4% is the second highest in the peer group. The Dow Chemical Company has the highest free cash flow yield of 6.2% while DuPont, Air Products and Chemicals, and Airgas have dividend yields of 2.6%, 2.8%, and 2.3%, respectively. Praxair has a positive and stable free cash flow. We’ll discuss its leverage in the next couple of articles.

The iShares US Basic Materials ETF (IYM) tracks the performance of US-based basic material companies including chemical players. The combined holdings of Praxair, DuPont, The Dow Chemical Company, Air Products and Chemicals, and Airgas make up 36.5% of IYM’s total holdings.

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