Chart Industries: Don't Fall For The Recent Rally

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 |  About: Chart Industries, Inc. (GTLS), Includes: MTRX, PX
by: Fusion Research

Chart Industries (GTLS) is a leading global provider of engineered cryogenic equipment, primarily used in energy processing applications. These are utilized throughout the liquid gas supply chain for the purification, liquefaction, distribution, and storage of natural and industrial gases. It primarily operates in the U.S., the Czech Republic, China, and Germany, and has a global presence. Chart Industries has three segments: energy and chemicals, distribution and storage, and biomedical.

The demand for liquefied natural gas, or LNG, as a domestic and vehicle fuel has grown significantly and is projected to grow at an even faster pace in the future. This growing demand is proving to be beneficial for Chart Industries' energy and chemicals, and distribution and storage segments. The company is uniquely positioned to tap into the growing LNG market because of its strength in the Chinese market. The growing number of fuel stations in the U.S. also bodes well for Chart Industries. Let's see what this company has in store it for the investors.

Energy and Chemicals Adding Strength

Liquefied natural gas, or LNG, is natural gas converted to liquid form, allowing it to be easily stored and transported. LNG liquefaction is the process of removing impurities, certain elements, and heavy hydrocarbons, followed by condensation of natural gas into a liquid.

Chart Industries remains well positioned in this LNG liquefaction market, because of its small scale LNG liquefaction capabilities. Small-scale liquefaction plants' compact size enables the production of LNG close to the location of use. This proximity allows transportation at lower costs, and it also reduces LNG product costs for consumers. Chart Industries' small-scale plants include process design, engineering design, and equipment provides order opportunities ranging from $20 million to $50 million per facility, depending on their respective sizes. These facilities have liquefaction capacities ranging from 100,000 gallons per day to 450,000 gallons per day.

North America is facing a demand/supply gap in the LNG market, with the current supply not able to meet the current or anticipated demand. Shell, Clean Energy (CLNE), Noble Energy (NBL), Stabilis Energy, and Applied Natural Gas Fuels are the major suppliers among a number of suppliers, which are planning construction of small scale liquefiers in an attempt to significantly expand supply over the next few years. The LNG supply to support domestic fueling is expected to triple or quadruple over the next couple of years, as shown in the table below.

Availability of LNG to Support Domestic Fueling

Year

LNG Available to Market (gallons per day)

2012

600,000

2013 (Expected)

800,000

2014 (Expected)

1,450,000

2015 and beyond

3,450,000

Click to enlarge

Source: Prometheus Energy.

In July 2013, Noble Energy awarded Chart Industries with a contract for its energy and chemicals segment. As per this contract, Chart Industries will provide Noble with a processing facility capable of producing approximately 100,000 gallons of LNG per day. The facility, located in Colorado, will be fully integrated with a new gas processing plant. It is expected to be fully operational by the end of 2014.

The growing LNG demand and the benefits of small-scale LNG liquefaction will prove to be the leading drivers for Chart Industries' growth. The energy and chemicals segment is positioned to accelerate in the remainder of 2013 and beyond as a result of the growing demand. This segment contributed $324 million revenue in 2012. Riding on the growth in LNG demand, it is expected to contribute $410 million in 2014, growing at a CAGR of 12.5%.

Growing Demand for Gas Stations

-- China

It will be interesting to look at the growing LNG distribution and transportation infrastructure in China and the U.S. The fuel station development data, provided by the leading Chinese energy companies, shows that the expansion has been accelerating in the past, and should continue accelerating in the future. Kunlun Energy increased the amount of stations in operation and/or under construction from 31 in 2010 to 474 in 2012. Guanghui Energy plans to grow from 103 stations in 2012 to 668 stations in 2017, and ENN Group plans to grow from 86 stations in 2012 to 500 stations in 2015.

The demand for LNG fueled buses in China is increasing. Beijing Public Transportation Group plans to purchase 3,100 LNG fueled buses for public transportation in 2013. If these buses perform well, it will add 30,000 more such buses by the end of 2017. Looking at this growing market, Beijing Gas Group plans to build 70 to 100 LNG fueling stations by the end of 2013, and it will also build at least 70 additional fueling stations each year from 2014 to 2017.

In July 2013, Kunlun Energy Investment, a wholly owned subsidiary of PetroChina's Kunlun Energy, awarded Chart Industries' Chinese distribution and storage segment a contract to provide LNG station modules. This contract is valued at over $50 million and follows a $45 million contract Chart Industries received from PetroChina in April 2013. The new contract is not included in the company's second quarter 2013 orders and backlog. This is the third major contract that Chart Industries has won from PetroChina in the last several quarters. Getting these kinds of contracts from a Chinese giant is promising for Chart Industries' growth and will fuel the confidence of other Chinese companies to award contracts to this company. Chart Industries is estimated to supply equipment for 250-300 of the stations PetroChina constructs in 2013.

-- U.S.

The LNG demand curve in the U.S. also looks very promising. As of June 2013, construction of 275 LNG fueling stations has been announced and an estimated additional 70 stations between Clean Energy Fuels and Shell have yet to announce locations. Shell and Clean Energy are on the lookout for liquefaction facilities to supply their fuel stations.

These companies are likely to award the majority of their contracts to Chart Industries' distribution and storage segment as the equipment provider for their fuel stations. The increasing demand for LNG fueling stations will drive the demand for LNG fueling station equipment, which will be beneficial for Chart Industries, because it has fewer competitors in this market.

The growth opportunities in China and the U.S. should accelerate distribution and storage orders for the remainder of 2013. While this segment fetched revenue of $476 million in 2012, it is expected to grow at a robust CAGR of 18.2% and account for $665 million of revenue in 2014.

Competitor Analysis

A look at the stock price performance over the last three months presents a very interesting picture. In early May, it was trading at the $85 level. Over the last three months, though, it has grown more than 30% and recently surpassed the $115 mark, touching a 52-week high of $117.25. This compelling stock price growth came after the second quarter earnings release, with the stock showing a near 15% growth from around the $100 level to $115. Investors reacted to the good second quarter earnings results, by accumulating the stock in large volumes, causing the stock price to rise.

Click to enlarge images.

Click to enlarge

Source: YCharts.

It is very natural for any investor to be skeptical about the future growth possibilities of a stock trading near its 52-week high that has grown significantly in the last three months. Comparing Chart Industries with its peers will help us arrive at a conclusion. I will briefly cover Chart Industries' peers, Praxiar (PX) and Matrix Service (MTRX), and then we will have a look at how these companies compare with each other on various valuation metrics.

Praxiar

Praxiar has presence in the Americas, Europe, and Asia, and is engaged in the production, distribution and selling of atmospheric and process gases, and surface coatings. It serves various industries including healthcare, petroleum refining, water treatment, and chemicals industries, among others.

Matrix Service

Matrix Service provides fabrication, construction, engineering, and maintenance services in the U.S. and Canada. It caters to the oil, gas, power, minerals, and petrochemical markets, among others.

A few of the key valuation metrics for the three companies are presented below:

Metric/Company

Chart

Praxiar

Matrix

Revenue (million)
(TTM)

$1,130

$11,480

$841.88

Current Share Price
(as on 05.08.2013)

$114.42

$120.19

$16.91

Market Cap
(Million)

$3,470

$35,440

$440.86

P/E Ratio

47.07

21.41

24.16

Forward P/E ratio
(fye)

26.19

17.92

14.09

Price/BV
(mrq)

5.1

5.98

1.88

Price/Sales

3.08

3.09

0.51

Click to enlarge

TTM = trailing 12 months; mrq = most recent quarter; fye = financial year-end 2014; source: Yahoo Finance.

It is not surprising to see that Chart Industries has taken a beating on almost all valuation multiples here, when compared to its competitors. The kind of run that the stock had in the past three months, and over the past week in particular, is responsible for this. At the current levels, this stock looks overvalued, and the growth opportunities in the energy and chemicals, and distribution and storage segment are already factored into the stock price. I don't visualize any significant upside in the stock price, and investors will have to wait for this stock to be available at attractive valuations to consider investing in it.

Conclusion

Chart Industries' energy and chemicals segment is looking healthy because of its small scale LNG liquefaction capabilities. The growing LNG demand is driving the growth for this segment. The increasing number of LNG-fueled buses in China, and the growing number of LNG fueling stations in the U.S. and China are increasing the demand for distribution and storage equipment. This will be responsible for a robust growth in the distribution and storage segment of the company in the future.

However, the stock had a bull run in the last few months, factoring in the future growth opportunities for the company. This stock has become an unattractive investment option, and I don't see any significant upside from the present level. Hence, I recommend a hold on this stock.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.