It takes time to reorganize a country's energy infrastructure, let alone the world's, but there are nevertheless real signs of progress when it comes to natural gas. While the LNG story is still dominated by large energy companies looking to monetize huge natural gas fields in remote corners of the world, there has been progress towards the use of LNG in place of gasoline or oil in many applications around the world.
As that process continues, the potential for Chart Industries (GTLS) should only improve. That said, while there is a pretty hot future in keeping gas very cold, the company's current financial performance and valuation leave something to be desired.
Fourth Quarter Results
Chart Industries is something of a momentum story right now, but investors didn't seem overly bothered that revenue came in a little shy of sell-side expectations. Revenue grew 4% sequentially and about 38% from last year, as weak sequential performance in Energy and Chemicals and BioMedical was offset by solid double-digit performance in Distribution & Storage.
The company is trying to accommodate rapid demand growth, and that's taking a toll on margins. Gross margin slid almost three points overall from last year (and a similar amount sequentially), while operating income dropped 17% sequentially and operating margin compressed by about three points as well. Margins took a hit from product mix and some input cost inflation, but the bigger factor seems to be costs tied to ramping up production to keep up with demand.
Orders Don't Reflect The Real Opportunities
Investors may look at the flat sequential order growth and conclude that demand is not all that strong, but that would be a mistake. Based on what rivals like Linde and customers like Air Products (APD), ConocoPhillips (COP), and Bectel are saying, lead times on heat exchangers is approaching about one year.
What's more, that doesn't include projects where awards haven't yet been made. There are numerous LNG projects on the drawing board in Australia, and major gas discoveries in Africa could well lead to additional projects there. On top of all that, there are domestic projects led by companies like Chesapeake (CHK), Shell (RDS), and Cheniere (LNG) that could further strain capacity in the heat exchanger, containment vessel, and cryo equipment markets where Chart competes.
It wouldn't surprise me, in fact, if Chart started getting a bit more choosy with its projects. With so much business to be had, Chart should have the opportunity to pick contracts on the basis of margins and not just total revenue. That does carry some risk with it, though, as customers like Air Products, Air Liquide and Praxair (PX), may choose to become competitors (as they already are in cold boxes). What's more, Chart could inadvertently give a helping hand to emerging market rivals if they get too picky.
Exploiting International, While Waiting For Domestic
Right now, most of the real opportunities for Chart are in supporting large E&P or transport companies looking to exploit and transport large volumes of cheap natural gas. Longer term, though, there is still a hope that the U.S. will see reason and more fully embrace LNG as an option for energy needs like vehicle fueling.
With Chesapeake aggressively promoting more LNG infrastructure and strong investor sentiment for names like Westport Innovations (WPRT) (which focuses on light and heavy-duty engines that can run on LNG or CNG), it's not hard to see how Chart is also looked at as a play on this potential.
The Bottom Line
The Street seems to have mostly shrugged off the modest disappointments in sales, orders, and margins this quarter. Valuations being what they are, though, investors shouldn't press their luck and expect that to continue; growth will need to pick up and the company will need to meet its numbers or those multiples will shrink.
Lest anyone think I'm down on Chart, I'm willing to model 18% compound growth in free cash flow over the next decade. Even with that sort of performance, though, the stock is pretty much fairly valued at today's prices. Admittedly, a concerted effort to adopt LNG/CNG-powered vehicles in North America (or even Japan) would represent material upside, but CB&I (CBI) may be the better play for ongoing LNG infrastructure growth today. Still, as story stocks go, the Chart story is a good one and this would be a stock that I'd love to reconsider at a lower price.