Chart Industries - A Solid Core Business With Potentially Transformative Growth Opportunities

 

Chart Industries (NYSE:GTLS) offers a good case in point of how difficult it can be to stick with transformative growth stories. If you’re lucky, you get a chance to buy in when the growth opportunities aren’t visible (or are widely dismissed), but then when the story starts to work, you have to reconcile increasingly demanding valuations with the underlying growth opportunity.

To be fair, Chart shares aren’t that much more expensive than when I last wrote on the company, with the shares up about 15% against a 9% upward move in the wider industrial sector and a roughly 12% positive move in the S&P 500. Still, from my September 2020 article or October 2019 pieces, the shares have enjoyed quite a run as the market has started pricing in the company’s attractive growth opportunities in cleaner energy and various industrial end-markets.

As I said, valuation is challenging. On my base assumptions the shares look priced to deliver long-term returns around the mid-to-high single-digits, but that’s modeling in less than 10% of the total addressable market that management is projecting for 2030 just for the Specialty Products business (excluding energy and most industrial gasses). If hydrogen and carbon capture really take off, and Chart plays a central role, there’s absolutely meaningful upside to the revenue and cash flows currently in my model.

 

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Chart Industries - A Solid Core Business With Potentially Transformative Growth Opportunities

Chart Industries: From Cleaner Energy Upside To A Cleaner Energy Story In 6 Months

For quite a while my thesis on Chart Industries (GTLS) has been that it's a really good industrial gas infrastructure company with meaningful operational upside from cleaner energy opportunities like LNG and green hydrogen.

That perception has definitely shifted in the last six months, with the company aggressively pursuing opportunities in green hydrogen and carbon capture, as well as emerging industrial growth opportunities and ongoing LNG opportunities. With Chart Industries now seen as a clean energy play (or "cleaner" at least), the shares have more than doubled since my last update and now trade like an industrial growth stock.

Valuation here is challenging, just as it is in other industrial growth areas like automation - the operational upside is certainly there, but a lot of growth is already baked into the share price. I do still see okay long-term upside potential, but I would caution investors that volatility is likely to remain high given energy tech's growth darling status at the moment.

 

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Chart Industries: From Cleaner Energy Upside To A Cleaner Energy Story In 6 Months

Chart Industries Seeing Stable Industrial Trends, With Long-Term LNG Upside

It's great to have a solid core business that can pay the bills in the bad times, and that's how I look at Chart Industries' (GTLS) core industrial gas business. It's never going to be an exciting growth business, but it can do more than just keep the lights on. Meanwhile, this company also has attractive leverage to large-scale LNG projects and the future growth of alternative fuels like hydrogen. I also applaud management for restructuring the business more in keeping with its long-term core focus.

I liked Chart Industries back in April, and the shares have come close to doubling since then (they actually did double, but have come back a bit since). Although I do think the more energy-exposed parts of the business will need some time to recover, the LNG business remains attractive over the long term, and the company has done well on costs. Despite the sizable move in the share price, I do still see some upside here.

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Chart Industries Seeing Stable Industrial Trends, With Long-Term LNG Upside

Chart Industries Worth Another Look With LNG Mostly Washed Out

I’ve written in the past about the difficulties that go with modeling Chart Industries (GTLS) and its exposure to the significant upside and uncertainty around large LNG orders, not to mention the volatility that is part and parcel of the U.S. natural gas business. Beyond that, though, Chart still has a very strong industrial and medical gas business; a business that has cyclicality, yes, but that still provides a more stable source of value.

Since my last update on the company, the oil & gas sector has melted down, taking gas processing and LNG with it. I do think we’re looking at a multiyear recovery path for North American energy infrastructure, but I think the industrial gas business will hold up better once we get past these COVID-19 closures and disruptions. There’s absolutely elevated uncertainty here, and I’m hiking my discount rate as a result, but I think these shares are worth a look from more aggressive investors who can be patient with respect to natural gas and LNG project recoveries.

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Chart Industries Worth Another Look With LNG Mostly Washed Out

Look Past The Choppy Near Term, And Chart Industries Looks Appealing

There’s no “one size fits all” approach for reconciling choppy short-term trends with more exciting long-term drivers, but I find these situations can often lead to above-average investment gains for the patient investor. Chart Industries (GTLS) definitely has some near-term risk to lower natural gas-related spending in the upstream and midstream markets it serves, and some industrial cycle risk as well, but I believe those short-term risks pale next to the long-term opportunities in LNG, alternative fuels, and new end-markets.

I’m pretty bearish on U.S. onshore oil & gas spending, but I’m not sure the market is yet and that is my biggest near-term concern with Chart Industries. Longer term, I’d highlight the risk of political action against large-scale LNG exports from the U.S. as a key concern, even if it is not particularly likely. Even with those risks, though, I think the long-term opportunity is pretty interesting; it’s a pretty easy call at $60 and even here closer to $65, I still like Chart as an idea in 2020.

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Look Past The Choppy Near Term, And Chart Industries Looks Appealing

Choppy Near-Term Trends And LNG Order Uncertainty Hitting Chart Industries

With so much of Chart Industries' (GTLS) upside tied to unbooked orders for LNG capital equipment, I can understand why worries about pushed-out timelines for large LNG export facilities would be hitting the shares. On top of that, the outlook for midstream capex in 2020 isn't very good and the slowdown hitting many industrial end-markets is likely to lead to lower industrial gas orders. As LNG prices have recently hit multiyear lows, I suppose it's not so surprising that Chart shares are near a 52-week low and the shares are down more than 20% from the time of my last update.

While understandable, I'm not so sure this downturn is entirely reasonable. True, the LNG outlook has risk to it; orders could get delayed or disappear altogether under certain circumstances. But at this point, I think a lot of the LNG opportunity has been derisked; I can't say that Chart is trading just on the value of its industrial gas business, but it's pretty close - if the E&C business would grow only 2% from 2019 levels (with mid-single-digit growth from the D&S businesses), the shares would be around fair value in my model.

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Choppy Near-Term Trends And LNG Order Uncertainty Hitting Chart Industries

Chart Industries Really Just Getting Started

Chart Industries (GTLS) is still really difficult to model, but I said in my last piece that these shares would have a lot more appeal in the mid-$70s and here we are... and that’s with the company logging a big LNG order in the meantime and likely to book a few more before 2019 is over. I do have some concerns about a near-term slowdown in industrial gas demand, but that is counterbalanced, at least in part, by active efforts on management’s part to cultivate new market opportunities.

As fits a company that is difficult to model, with 2020 revenue possibly 70% (or more) above 2018’s level, Chart Industries shares are beastly difficult to value. The shares do look undervalued on discounted cash flow, but that assumes a reasonably accurate assessment of the size, duration, and profitability of the LNG building boom. The shares could be even more undervalued on a multiple-based approach (the average sell-side target is over $100), but with not even Chart management knowing what normalized earnings will look like over the full cycle, the “right” multiple is pretty much a guess.

Said simply, I think you can buy Chart here and make money, and possibly a lot of money when sentiment fires up again, but this will be a volatile stock.

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Chart Industries Really Just Getting Started

Harsco Shifting From Turnaround To Transformation

Harsco (HSC) is a case-in-point as to why I say that successful turnarounds can exceed your expectations at the start of the turnaround, as management has done a great job of improving its core Metals & Minerals business and it seems as though some of the changes made to the Rail business are about to start paying off. On top of that, Harsco benefited from lucky timing (always a good thing in a turnaround) with the global recovery in steel production and in markets like oil/gas (for its heat exchangers).

Now management is underway with a transformation process that is seeing the company become less of a multi-industrial hodgepodge and more of a focused player in industrial-environmental markets like waste reclamation and treatment. Although the bigger move into waste treatment carries some operational risk, I believe management has earned the benefit of the doubt with respect to its ability to execute.

As for the shares, even with this recent sell-off, the shares are up about 10% from the time of my last article. I saw high $20’s to low $30’s value then, and I still see that now, and a return to the low $20’s in a broader market sell-off would be an opportunity to consider.

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Harsco Shifting From Turnaround To Transformation

Alfa Laval Buoyed Again By Strong Marine Results

As has been the case for most multi-industrials, particularly in the capital goods sector, Alfa Laval (OTCPK:ALFVY) (ALFA.ST) has shaken off some of the malaise that had pushed the shares down until relatively recently – while Alfa has outperformed its industrial peers since my last update, the 6-month and 12-month comparisons have Alfa lagging the market as sell-siders and investors have grown worried about what will happen as scrubber orders start to fade.

Although I’m not wild about the valuation (nor the valuation on industrials more broadly), this is still a company that I like quite a bit. I think there’s more opportunity in marine than just scrubbers, and I think longer-term opportunities in food, beverages, life sciences, and HVAC are not always given their due. Give me a 10% to 15% pullback and these shares get much more interesting as a potential longer-term holding.

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Alfa Laval Buoyed Again By Strong Marine Results

With LNG Opportunities Coming Into View, Chart Industries Looking More Exciting

Chart Industries (GTLS) is almost equal parts exciting and frustrating today – exciting because the opportunity in small-scale LNG has never looked better, and frustrating because it’s difficult to time orders and revenue and the recent resegmentation of the business creates some modeling challenges. All told, though, while I do have some concerns about the valuation and the near-term outlook for the company’s legacy industrial gasses business, the opportunities in natural gas, LNG, and growth segments within industrial gasses are pretty compelling.

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With LNG Opportunities Coming Into View, Chart Industries Looking More Exciting

Atlas Copco's Better Fourth Quarter Offset By Ample 2019 Uncertainties

The past year (2018) was a relatively rare year where Atlas Copco (OTCPK:ATLKY

) underperformed its industrial peers, as worries mounted throughout the year about the company's semiconductor-exposed Vacuum Technique business. Performance has improved on a relative basis over the last few months, though, as investors start considering whether semiconductor orders may recover in 2019 and whether other industrial markets may not slow as much as feared.

I'm still in the camp that thinks economic growth will slow more noticeably in North America, Europe, and China as 2019 goes on. Atlas Copco may well outperform in that environment (it certainly did in the fourth quarter), but investors considering the shares have to accept the risk of conditions getting worse before they get better. Atlas Copco isn't a clear-cut bargain today, but it's close enough (and seldom gets truly cheap) that I'm tempted to take the risk.

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Atlas Copco's Better Fourth Quarter Offset By Ample 2019 Uncertainties

Multiple Tailwinds Filling The Sails For Chart Industries

Chart Industries (GTLS) has been through some tough times in its past, but the outlook today is much brighter as multiple tailwinds come together to push results, estimates, and the share price higher. The shares have more than doubled over the past year, and climbed close to 60% just on a year-to-date basis, as the company continues to see strong demand from gas processing, vehicle fueling, industrial gas, and newer opportunities like space vehicles.

Chart Industries has significant untapped potential operating leverage and the double-digit revenue growth I expect over the next few years should push margins into the double-digits. Better still, LNG liquefaction orders remain a very significant potential positive driver in the coming years as global LNG demand continues to rise. That said, today’s price does assume quite a lot of growth already and this is more of a momentum-based story driven by the ongoing top-line outperformance and growing order book.

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Multiple Tailwinds Filling The Sails For Chart Industries

Alfa Laval Flexing Its Late-Cycle Muscles

I liked Sweden’s Alfa Laval (OTCPK:ALFVY) (ALFA.ST) earlier this year as a late-cycle play on stronger Marine and Energy orders, as well as decent prospects for ongoing growth in the Food/Water business. Much of that has come to pass, and the shares are now about 20% higher than they were at the time of that last article. Alfa Laval has since logged two very strong quarters, and those hoped-for improvements in the company’s three main business lines have materialized with stronger revenue, orders, and margins.

With the strong move in Alfa Laval’s share price, not to mention some growing concerns about how much is left in this current industrial upswing, I believe these shares have moved from good idea to okay idea. The implied long-term return is still in the high-single digits, which isn’t bad, and I won’t be too surprised if the company has at least one more better-than-expected quarter up its sleeve. Still, I wouldn’t push my luck too far, even though I regard this as a well-managed operator in some attractive businesses.

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Alfa Laval Flexing Its Late-Cycle Muscles

Harsco's Restructuring And Improving Commodity Markets Have Boosted Results

It has been a painful process, but Harsco's (HSC) share price is almost back to where it was five years ago and up sharply from sub-$4 lows two years back from today. Much better operating conditions for Harsco's steel mill customers have certainly helped, and the shares have somewhat mirrored steel producers like U.S. Steel (X) and ArcelorMittal (MT) over the last two years, but I wouldn't undersell the company's committed efforts to exit bad contracts and restructure the business for better margins.

Now Harsco is looking at a healthy (albeit probably peaking) steel sector and significant recovery growth in heat exchanger demand. The Rail business isn't doing particularly well, but that is not so surprising and remains a long-term project. Valuation is tricky, as I'll discuss later, but I believe you could make a relative valuation argument to support a higher share price from here.

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Harsco's Restructuring And Improving Commodity Markets Have Boosted Results

Rebounding Petrochemical Demand Heating Up Chart Industries

Chart Industries (GTLS) was already looking at a stronger 2018, as recoveries in the oil/gas and industrial gas markets started pushing more and more orders into the company’s backlog. On top of that, the company stands to benefit from the ongoing integration of Hudson and the expansion of its service operations. Even with a good outlook heading into 2018, Chart’s first quarter results were stronger than expected, giving another boost to a story that already had some good momentum. While I believe it is still hard to argue that Chart is significantly undervalued, better than expected financial performance can certainly raise the bar and I expect to see strong reported results for a couple more quarters (at least).

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Rebounding Petrochemical Demand Heating Up Chart Industries

Chart Industries Riding A Recovery But Also Shifting The Business In Meaningful Ways

Chart Industries (GTLS) shares were hammered during the downturn in energy and process industries but are already up about 4x from the early 2016 bottom as the company has benefited from recovering demand in natural gas processing and recovering demand for industrial gasses. Better still, not only has management expanded and diversified its business with the Hudson deal, management seems more interested in backfilling the service and aftermarket opportunities.

With the shares up so strongly (up 80% in the last 12 months), I'm not too surprised that I don't see a lot of low-hanging value here. There are still meaningful opportunities in LNG and I believe the market often underrates the company's core industrial gas business, but today's valuation looks pretty reasonable for a company that should generate mid-single-digit revenue growth and double-digit FCF growth over the next decade.

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Chart Industries Riding A Recovery But Also Shifting The Business In Meaningful Ways

Harsco Reaping The Benefits Of Restructuring, Even As Energy Markets Remain Tough

Credit where due – Harsco's (HSC) management continues to deliver on its turnaround plans and this multi-armed industrial company is now looking toward growth again in a few of its businesses. I underestimated the upside that was still left in these shares a year ago; while I thought a fair value in the mid-to-high teens was possible if the company executed well, I didn't think shareholders would get a 50% return in such a relatively short time. Granted, some of that upside has come from the overall market melt-up, but I do believe Harsco has outperformed its targets.

What comes next has a lot to do with macro factors that are outside of management's control. I still believe that traditional steel mills in North America and Western Europe don't have a bright long-term future, but conditions have improved in the near term and Harsco has been turning its attention to other markets like China. What's more, there are opportunities to expand this business, as well as expand and diversify the Industrial segment and drive better margins from the Rail operations. I wouldn't expect another 50% move over the next twelve months, but so far Harsco is proving the point that well-constructed turnaround plans can exceed initial expectations, and particularly so when improving end-markets help the cause.

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Harsco Reaping The Benefits Of Restructuring, Even As Energy Markets Remain Tough

Chart Industries Getting Back On Track

Although it is much too soon that the LNG market opportunity is really coming back, Chart Industries (NASDAQ:GTLS) has been strong over the past year (up almost 40% from the time of my last article). Attributing performance always involves some guesswork, but I believe Chart has done well due in part to optimism over the new administration (as it pertains to tax reform and supporting U.S. energy exports), growing confidence in an industrial recovery, optimism that LNG activity is bottoming out, and at least some recognition of self-help efforts at the company.

Chart Industries appears priced to generate a long-term return in the 9% to 10% range, which isn't bad considering that that leaves some upside from a more bullish “strong LNG” scenario that could potentially add many hundreds of millions of dollars to the long-term revenue outlook. Although management has been sounding more upbeat of late, I'd caution readers that these shares are have been more volatile than average in the past, as the market has swung wildly from optimism to pessimism over the outlook for expanded LNG-related business.

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Chart Industries Getting Back On Track

Seeking Alpha: Chart Industries No Longer Left For Dead

Back in January, I thought investors had the sort of opportunity I love to find in the market - the chance to buy a stock that had been pounded because a major growth driver seemed to be evaporating, and pounded to a point where the less exciting, but still profitable, base business more than justified the share price. Such was the case with Chart Industries (NASDAQ:GTLS) back in January, and the shares have come back nicely since then, even though the LNG growth story is still in trouble.

I continue to believe that Chart Industries is a good company in the industrial gas/energy space. With the rebound in the shares, though, I think the dramatic undervaluation has been mopped up and investors now have to have more conviction and optimism about the future of the LNG business to drive a substantially higher fair value. I do believe that the company stands to generate hundreds of millions of dollars from LNG export/import facilities in the coming years, but the move toward a more significant LNG-based transportation chain in the U.S. is farther off and less certain in my view. Chart still looks like an okay stock in my view, but there will be a lot of bumps in the road over the next couple of years, and I think investors should typically shoot for better than "okay".

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Chart Industries No Longer Left For Dead

Seeking Alpha: The Market Seems To Think Chart Industries Is Back To Square One

That shiny new natural gas economy that was a rock star in the markets a few years ago and supposed to lead us into the next decade has wound up where sadly all too many rock stars of the past have - floating face down in a pool. In this case, it was a pool of cheap oil, as the sharp drop in oil prices has led many would-be users of LNG to table those plans for the time being, leading to much slower progress on LNG export terminals, and filling stations.

This hard stop in the natural gas industry, combined with much tougher conditions in China, has hammered the shares of Chart Industries (NASDAQ:GTLS), with the stock down over 40% in the past 12 months and nearly 60% since my last piece on the company.

While I had thought expectations were still a little elevated back in May, little did I suspect that activity across LNG would shrink so far so fast. At this point, it would seem that Chart Industries is being valued only on the basis of its industrial gas business, a good business where the company has long enjoyed #1 or #2 share in most of its primary markets, and arguably even undervalued just on that basis. While the timelines for large-scale U.S. LNG exports and wider usage of LNG as a transportation fuel have certainly stretched out, to give the shares no value for them at all seems unduly harsh to me.

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The Market Seems To Think Chart Industries Is Back To Square One