Industrial gas producers pull economic moats literally out of thin air by separating this abundant resource into its specific components: oxygen, nitrogen, and other specialty gases. The firms, via their on-site distribution model, receive handsome remuneration because of the substantial explicit and implicit costs of a plant shutdown. Establishing an on-site plant creates a regional monopoly, and firms maximize their returns on invested capital by selling excess product via bulk and cylinder methods.
Not all players are alike, however, so our economic moat ratings differ. Praxair (PX) earns a wide moat for its best-in-breed portfolio and industry-leading returns. Air Products (APD) earns a narrow moat because of its on-site exposure, offset by its outsize nongas exposure and large concentrations in electronics and hydrogen (energy) that weaken its returns on invested capital. Airgas (ARG) specializes in the least desirable distribution method (cylinders), but earns a narrow moat because it generates enough gas internally to deliver positive returns on invested capital.
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Basili Alukos does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.