Chart Industries Rides the Natural Gas Trend

Energy markets are getting attention as investors contemplate a potential recovery, and oil prices begin to retake some of their losses from the past 12 months. Earlier this month ZachStocks featured Chesapeake Energy (CHK) as a long idea which could benefit from an increase in natural gas pricing. Today I want to look at a niche ancillary company which should see its business improve as a function of increased activity in natural gas markets, regardless of the price direction.

Chart Industries Inc. (GTLS) is a relatively small company with a market cap of just under $600 million. The firm specializes in providing equipment for the natural gas market, including tools for purification, liquefaction, distribution, storage and finally the end use. GTLS is based out of Ohio, but has operations across the US and has built an international presence in Australia, China, the Czech Republic, Germany and the United Kingdom.

Long-term investors have become somewhat jaded as the stock dropped from a high in the mid $50’s last year, to a March low which was just over $5.00 per share. Regardless of the quality of the company, it’s hard for any investor to stomach losing 90% of the value of a position. But ironically during this tepid decline, the company actually remained profitable, putting up Earnings Per Share of anywhere from 64 cents in the December quarter to 71 cents in the most recent quarter ending June 31. Analysts are currently expecting the company to earn $1.65 for 2009 and see that level decreasing to $1.16 next year.

As energy markets begin to improve, natural gas has seen its popularity increase (remember, natural gas is the cleanest burning fossil fuel, and with demands for electricity picking up we can expect many utilities to increase their NG consumption). Regardless of the commodity price, political pressure towards greener production of energy will likely be very favorable for natural gas production levels. As more gas is pulled from the ground, the need to transmit, liquefy, store, and distribute this gas will become even more intense and drive business for GTLS. So I believe the assumptions for 2010 are relatively conservative and the company could quickly surprise investors with positive news.

The most recent quarter was a prime example of improving metrics for the company. While earnings were admittedly down 7% compared to last year, the gross margins reflected success in recent cost cutting programs and the leaner structure will likely lead to future earnings improvements. In fact, management increased earnings guidance for 2009 to a range of $1.50 to $1.70 compared to earlier guidance of $1.30-1.60. Statements on the most recent press release were cautious, but optimistic:

Our cost reduction initiatives are driving strong financial performance despite continued weakness in order entry. During the quarter we continued to implement aggressive cost containment actions to right-size our businesses, but we also continued to experience good project execution in our Energy and Chemicals (”E&C”) business. ~Sam Thomas, President and CEO

During the second quarter Chart Industries made two niche acquisitions to round our their portfolio of offerings. The first was Chengdu Golden Phoenix Liquid Nitrogen Container Co., which is obviously a liquid nitrogen company in China. The acquisition boosted the company’s biomedical division and while GTLS receives most of its revenues from energy customers, it also has a presence in biomedical, the food industry, entertainment, thermal testing, alternative fuels, and vacuum systems. Hopefully over the coming years we will see the revenue stream become more diversified which will add to the stability of future revenues.

The second acquisition was a replacement parts supplier in Tulsa, Oklahoma. Both of these purchases were straight cash acquisitions which keeps investors from seeing their shares diluted. At the end of the quarter, Chart had $205.4 million in cash which should give them plenty of flexibility for future strategic acquisitions. While long-term debt is $243 million, the company is adequately capitalized and has positive cash flow to be able to service its debt for some time to come.

Over the past 9 months, the stock has rebounded from its climactic low and has built an attractive pattern. Long-term investors may want to wait for a break above $22.75 in order to establish a full position, but with a relatively small capitalization, and the potential for a significant fundamental improvement in business, the stock could move very quickly. It would only take one or two institutional investors of moderate size to move this name 20% or 30%. The valuation is not cheap compared to analyst expectations, but I think over the next 9 months we could see expectations rise 30 to 40% (on 2010 earnings) and the stock trading into the mid-$30’s.

Disclosure: Author does not have a position in GTLS.

Comments

[Gwyn:]

I've owned GTLS from its earlier year lows. For me, its appeal was that it can do well regardless of the price of natural gas. When prices are rising and E&P (exploration & production) demand improves, its Energy/Chemical division does well. When nat gas prices are low, its Distribution/Storage division does well. It also has a great history and great management team. It is a world leader (top 3) in LNG processing and storage.
Natural gas is making a big transition from being supplied and priced locally to being supplied/priced globally. Mostly due to a global build out of LNG terminals (thanks in part to Chart). And, nat gas reserve continue to increase. Additionally, natl gas continues to have a 4-to-1 cost energy advantage (per BTU) over crude oil (not to mention a sizable carbon advantage). This type of environment is ripe for Chart Industries to perform very well over the coming years.

Aug 20 05:00 PM

[Mad Hedge F...:]

xcvb. Many traders are staring at their screens with rapt attention to see if natural gas can hold the new seven year low of $3. If it does, you can expect an explosive rally back to $3.50. If it doesn’t, the mother of all stop loss selling will ensue, as day traders and chartists, ignorant of the fundamentals of CH4, bail on positions that technically looked sooooo attractive. Seeing this terrible price action with a hurricane barreling in on the East coast is nothing less than amazing. NG owners have to be thinking that if you throw good news on a market, and it can’t go up, then get the Hell out of there. You could see $2/MCF in a heartbeat, and the washout could set up one of the great long plays of the decade. Buying on the back of others’ distress is always a great play. Please see my call on June 2 to sell NG at $4.30 by clicking here at www.madhedgefundtrader.... Remember the $13.50 we saw last year, or better, the $17 that printed after hurricane Katrina? They don’t call this contract the widow maker for nothing. For an excellent update on this clean burning fuel, go to the opinion page of the August 17 issue of the Wall Street Journal and read the piece entitled “New Priorities for Our Energy Future,” written by none other than two sons of the South, T. Boone Pickens and Ted Turner. (To read the full article, click here) at online.wsj.com/article.... They argue that the gigantic pool of NG recently discovered under the US exceeds the energy reserves of Saudi Arabia and should be used to transform our economy. But that isn’t going to help nervous traders decide if they should puke their long NG positions first thing tomorrow morning.

Aug 20 10:08 PM

[Zachary Sch...:]

Good information guys - Thanks!
zachstocks.com

Aug 27 08:18 AM