It's Been A Rough Year
On August 1st, 2013, Chart Industries Inc. (NASDAQ:GTLS) closed at $114.98. On August 1st, 2014, Chart Industries closed at $70.56 (and no, there were no stock splits or major share dilutions during this period). With some simple algebra we can discover that Chart has lost close to 39% of its value over the past year. Currently the stock is trading just 10% above its 52 week low of $64, and is down 46% from its 52 week high of nearly $131.
If you're in the market for a natural gas infrastructure play, you might be tempted to pick up some shares of Chart. I mean the company sure does seem cheap in terms of its recent price history, but what are you really buying for $70 a share?
Chart Industries Today
Here are a few valuation metrics to help give you an idea of Chart's current valuation:
Market Cap: $2.15 Billion
P/E (ttm): 28.6
P/E (fye 2015): 17.95
Enterprise Multiple: 13.82
A few things start to worry me when looking at the company's valuation. Firstly is the P/E multiple: 28.6 is awfully high for a company that has shown sluggish growth as of late (as we'll discuss in a bit). Even though the forward P/E is estimated to be a more reasonable 17.95x, I would take into consideration the fact that the company has already guided EPS estimates down twice this year - so I would take that forward P/E estimate with a grain of salt.
While a P/E of 28.6 isn't exactly astronomical, it's still a very difficult number to swallow for a company that has shown sputtering top and bottom line growth. Let's first start with revenue.
Over the past few quarters, Chart has failed to impress on the top line. Since the fourth quarter of 2013, the company has shown tepid annual revenue growth, especially in relation to its stellar growth throughout 2012. Year over year, fourth quarter 2013 revenue came in flat, first quarter 2014 decreased 3%, and second quarter 2014 grew a paltry 3%. It's understandable for a company to come in light on revenue for a quarter or two, but after three consecutive quarters of flat revenue, one has to wonder whether we're beginning to see a trend.
Now let's move on to earnings.
Since the fourth quarter 2013, earnings (similarly to revenue) have also shown poor year over year growth. What's even more concerning is that, when it comes to EPS, the only thing that Chart Industries can do on a consistent basis is disappoint. Over the past nine quarters, Chart has missed the consensus estimate nine times. On average, the company misses estimates by about 17.65%. Below is a chart tracking the earning misses.
And just when you thought things couldn't get much worse, let's not forget about how management has guided full year earnings estimates down for two quarters in a row. Going into first quarter 2014, the estimated EPS was $3.10-$3.50, but management readjusted guidance to $3.00-$3.40. In the second quarter report, management again lowered guidance, this time to $2.85-$3.15. During this time revenue guidance was also lowered from $1.30-$1.35 billion, to $1.25-$1.30 billion, to $1.22-$1.27 billion.
Where Is Chart Headed?
We've established that Chart has put up some very lackluster revenue and EPS numbers, yet the company is still worth something. Below we'll try to take a look at some of the potential returns we can see from Chart over the next few years. For this model, we'll be making a few key assumptions: 1) Chart earns $3.00 per share through 2014. 2) Chart grows EPS by 20% annually for the next five years. 3) The company trades at 15x earnings by the end of the 5th year.
So, assuming the above three criteria are met, and excluding variables such as share repurchases and dividends, Chart should be trading around $112 by the end of 2019 (just in case you're curious, here's the math: (3.00*(1.2)^5)*15). This would be a return of 58.6% from today's closing price. That's a decent return, but you don't invest in the stock market just to make decent returns - you want extraordinary returns. And in my opinion, this opportunity is just, well, ordinary. You must also consider that these calculations paint a very rosy picture for Chart. Can the company really sustain a 20% annual growth rate over the next five years? That would seem unlikely to me, especially considering the company's knack for missing analyst estimates and management's recent habit of guiding revenue and earnings down, down, down.
Although Chart might look like a steal at such "low" prices, I would steer clear of the company until management can prove that they are making progress in growing the top and bottom line on a consistent basis. It would also be nice for the company to meet earnings estimates every once in a while - but hey, you can't have it all.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.