Chart Industries Capitalizes on Energy Initiatives

As concerns with financial institutions such as Bear Stearns have thrown a large portion of the equity markets into turmoil, the energy sector continues to enjoy relative strength and a few names are climbing to new highs. Chart Industries (GTLS) is a name that may at times be overlooked, but a company that is making impressive progress in the natural gas and coal markets. Chart Industries operates in an attractive segment as an equipment company that caters to the large exploration and production (E&P) firms. Two of Chart’s largest clients include Exxon Mobile (XOM) and ConocoPhillips (COP). The niche that Chart participates in has less vulnerability to successful drilling or even to commodity prices. Assuming demand for commodities remains relatively high, and the E&P companies continue to find resources, Chart will have its hands full helping to facilitate the processes of their customers.

Chart reported its fourth quarter at the end of February and the numbers looked very attractive. While some highly anticipated large industry contracts remain stalled, the company has continued to take orders from smaller customers, building its backlog of business to a level of $475 million. When compared to full year revenue of $666m it becomes clear that the company does not have to win a significant amount of additional business in order to continue its track record of increasing sales and earnings levels. In fact, management is guiding sales for next year of $730 to 765 million and EPS should be in the range of $2.28 to $2.40. This guidance was above consensus expectations and so as analysts adjusted their estimates higher, the stock took a sharp turn higher. The consensus estimates are not for the company to grow EPS to 2.35 in 2008 which would represent an increase of 24%. Additionally analysts expect $2.96 of earnings in 2009, good for another 26% increase.

While analyst expectations are always subject to revisions, it is comforting to note that at this time the trend is for these revisions to be higher. Management is proving its adaptability as US distribution and storage business is under pressure. In the past, this segment has made up the majority of revenues, but now the energy and chemicals segment has taken the lead. This segment is responsible for helping clients to complete facilities that liquefy natural gas, or develop clean coal plants. The skill of management in adapting to the new environment is in sharp contrast to its 2006 decision to undertake two huge projects at a fixed rate. These endeavors developed higher costs than expected and ended up costing the company a significant amount of money. Lessons learned during this process have spurred management to create more strict standards for what contracts will be accepted and how they will be structured.

Looking ahead to 2008, it appears more and more of the company’s revenue will be in non-dollar currencies. Projects from the Middle East to Asia to the Pacific will likely make up a significant portion of the company’s business. This diversification in revenue currency has some definite benefits, but management will need to be careful to convey to investors exactly how it will handle such risks and what type of hedging strategies will be used. If the dollar were to rebound sharply, it would likely cause a strain on US earnings based simply on currency issues.

As the world continues to seek environmentally friendly alternatives to current energy policies, Chart Industries should benefit from new projects. The valuation on the stock is still relatively attractive compared to the expected growth in earnings. The stock has held its gains from the earnings announcement relatively well especially considering the market environment and as such, looks like an attractive stock to own.

GTLS Notes

Disclosure: Author does not have a position in GTLS