Chart Industries: Unlocking Value And 8% Dividend (GTLS)

Investment Thesis

Chart Industries (NYSE:GTLS), a mid-cap industrial company little known among retail traders, plays a crucial role in key sectors shaping our lives. The company, founded in 1992, manufactures and designs systems for pressurized liquid gases. Its systems, which sell between $5 – $100 million, are used in a wide range of industries. For example, they’re used by natural gas processing facilities to liquefy natural gas, by food processing companies using liquid hydrogen for blast freezing of food products, by beverage companies for carbonation of soft drinks, and by semiconductor companies for chip fabrication. In recent quarters, GLTS’s products found their way into new burgeoning industries, including hydrogen production, carbon capture and data center cooling, and space exploration.

I started this introduction by emphasizing the diversity of GTLS’s end users because it reduces the cyclicality often associated with companies selling capital goods, and the challenges often seen in companies tied to a single industry.

However, it is important to note that today, almost all of GTLS’s end-markets are experiencing growth.

• Natural Gas: Natural gas production is at its peak, despite low prices because it is often found with oil, and current oil prices are strong, supporting new drilling. Moreover, demand for natural gas is expected to increase in the next ten years, peaking in 2035. Internationally, new regulations against burning flare gases, require specialized equipment supplied by GTLS for processing.
• Hydrogen and carbon capture technologies are expected to grow rapidly, thanks to the enhanced subsidies offered by the Inflation Reduction Act.
• Food processing markets are characterized by resiliency against market fluctuations.
• Data centers are expected to increase on the back of digitization trends.
• Space exploration and satellite launches are expected to increase, on the back of advancements in satellite telecommunication technology. Think AST SpaceMobile (ASTS) and SpaceX (SPACE).
• The Chips Act is bringing more semiconductor manufacturing to the US, a complex process that encompasses the use of various cryogenic gases for fabrication.
• And the list goes on…

It is no wonder that in Q2 2024, every single market segment of GTLS in all geographical areas saw record revenue and earnings.

But there is more…

The reasons for my bullishness on Chart extend beyond the tailwinds to the sectors it serves. The company is cheap, growing fast, and has deep roots spanning three decades, but equally important, about 35% of its revenue is recurring sales related to maintenance, repair, and equipment leases.

Attractive Valuation

GTLS trades at a 11x forward PE ratio. This is an attractive valuation on its own and compared to peers. Take Air Products and Chemicals (APD), which is both a competitor and a customer of Chart. APD trades at a FWD PE of 22x, double that of Chart with half its growth. Baker Hughes (BKR) trades at a PE ratio of 16x. Linde (LIN) has a FWD PE ratio of 28x despite its revenue going down. Honeywell (HON), which is rated C- on Seeking Alpha’s Growth Quant Score, trades at a 20x PE ratio. General Electric (GE) is even more expensive, at 37x PE ratio, although it compensates for that with a higher growth than HON. Still, GTLS is growing faster than any of these peers.

Growing Fast

Last year, GTLS bought Howden and funded the purchase through debt and cash on hand. Naturally, any company that leverages up will see its EPS increase. The company’s shares have been punished for the leverage, but not rewarded for the spectacular sales growth.

There is still work to be done, and some cost synergies still need ironing. EPS still lags behind earnings growth, although we expect continued upward momentum seen since late 2023.

Free Cash Flow ‘FCF’ isn’t going according to plan, with some of this underperformance due to an ’emergency incident’ that cost $20 million, and an unplanned pre-order of materials worth $35 million.

Mixed Q2 2024 Results

Q2 2024 results released last week fell short of expectations. EPS stood at $2.18, missing forecasts by $0.27. Revenue reached $1.04 billion, up 14.6% year-over-year, but missed the target by $70 million.

My take: I am less concerned about quarterly misses than success in the Howden integration and margin expansion. I saw evidence of the latter in last quarter’s results, with margins continuing their upward trend, as mirrored in the EPS chart above, showing EPS rebounding from Q3’23 lows.

Adding to my optimism is that when sales comparison is adjusted for last year’s divestment of American Fan, which the company sold to Arcline Investment Management last October for $111 million, Cofimco to a private equity firm for $80 and Dry Diffusion, which the company also sold last year, sales grew by 18%. It is important to note that the Howden acquisition closed in March, so beyond tuck-in small acquisitions, the growth rates in Q2 are mostly organic.

Risk

GTLS is a small-cap that turned into a mid-cap stock in a short amount of time. This rapid rise could mean the company could stumble on the road, especially given the huge amount of debt it carries. The company was forced to restructure its debt in the early 2000s and experienced embarrassing failures, including tax accounting mishaps and project cost overruns, as reported in its SEC filings, with both incidents happening around 2007, according to the company’s 10-K filing at the time. Up until ten years ago, the company warned that it has historically found it difficult to execute large projects, citing two big contracts that have gone south. Sure, the company is bigger now, but mostly that’s from M&A, and one can’t help but wonder about their organizational structure, and whether they have it in them to run a big company.

Thus, while we see merit in the ticker, investors are warned that this is a speculative bet.

Interest expenses are the highest in the company’s history, standing at $320 on an annualized basis. Obviously, this was coupled with an increase in earnings, and earlier this year, Moody’s raised Chart’s outlook from stable to positive. Still, the high interest rate does increase the risk profile of the company, and what we’ll be watching is further improvements in margins and cash flows. If my expectations are correct, we could see the shares double. Management expects normalized EPS at $11.5, so if organic growth stays the same through 2025, we could see multiples rise to 14x or 15x, opening an opportunity for 41% to 50% capital appreciation, based on my price target of $161 – $172 per share.

Final Thoughts

Chart Industries present a compelling investment opportunity with its diverse customer base, attractive valuation and robust growth. Despite some risks associated with debt and past execution challenges, GTLS’s strong recurring revenue and improving margins lends me confidence in this investment opportunity.

The company’s cumulative preferred shares (GTLS.PR.B) are listed on the NYSE and currently yield 8%. The cumulative feature means that if dividends are not paid in one quarter, they will accumulate, offering an attractive proposition to income-oriented investors. They currently trade below the redemption price, adding further to their appeal.