Chart Industries Inc. (GTLS, Financial) is a leader in cryogenic tanks, heat transfer systems and other equipment having to do with the handling of industrial gases and liquids. Initially, the company was highly levered to the traditional oil and gas market, particularly liquified natural gas. However, in recent years, the company has expanded its reach into energy transition markets. These include hydrogen, helium, carbon capture, water treatment and others. The company also expanded its reach into rotating industrial equipment (fans, blowers, etc.) with the $4.4 billion acquisition of Howden, which was announced in November 2022 and closed the following March.
Chart's stock was as high as $242.59 in late 2022, before it announced the acquisition of Howden for $4.4 billion, while funding that acquisition mostly with high-yield debt. The company subsequently saw its stock price more than cut in half immediately after, though it recovered this summer to over $180 per share on continued positive execution.
However, the company saw its stock fall 25% after it reported third-quarter earnings on Oct. 27. After the nice summer recovery, the stock has now pulled all the way back near its 52-week lows of last January.
Yet digging into the details around the earnings report, it appears the market may have misunderstood the reasons behind the "miss." In fact, Chart's battered stock now looks very cheap based on its new 2024 guidance. While the stock is not without risk due to its high debt load, the risk-reward is now tempting for aggressive investors.
Third-quarter results
In the third quarter, Chart reported $897.9 million in revenue, missing analyst estimates by $137.7 million, while adjusted earnings per share of $1.28 also missed expectations by 23 cents. Moreover, the company lowered 2023 full-year sales guidance from $3.66 billion to $3.80 billion to a new range of $3.45 billion to $3.50 billion. Adjusted Ebitda guidance was also lowered from $780 million to $810 million to a new range of $745 million to $760 million.
In this nervous market, it is no wonder investors sold the stock following that report. And investors are likely especially sensitive with Chart, due to its high debt load.
However, digging deeper into the reasons behind the miss, there appears much less reason for concern. That means the sell-off may be far overdone, and the stock may be an opportunity.
Accelerated divestitures and project timing shifts explain the move
A large part of the reason behind the lowered full-year guidance was that Chart divested several non-core businesses earlier than thought. It was always part of the company's plan to divest $500 million worth of non-core businesses following the Howden acquisition. While the company sold its Roots business for $300 million back in August, Chart accelerated the divestiture of three other businesses in October, including Comfico for $80 million, American Fan for $111 million and Cryo Diffusion for 4.25 million euros ($4.48 million).
At the time of Chart's prior guidance, it had not contemplated selling these businesses until the very end of 2023 or early 2024. So while the absence of these businesses will lower revenue and Ebitda this year, this does not reflect negatively on its performance.
That being said, while these businesses are affecting fourth-quarter guidance, the divestitures did not affect the third quarter, which also missed. But digging into the reason for the miss there, it also does not seem as worrisome.
CEO Jill Evanko explained that over $100 million of revenue shifted out of the third quarter and into either the fourth quarter or early 2024, due to a combination of customers delaying delivery due to project design changes, as well as supply chain delays that affects Chart's ability to recognize revenue.
Evanko went on to explain on the conference call:
"…It's not lost revenue, it's timing of the revenue associated with whether that's POC for supplier deliveries or progress, whether that's customers that call us and say, 'Hey, we want to add a capability or tweak a design to get more output from the nameplate production,' or whether that's us moving and prioritizing a customer because they have an urgent situation and we get less revenue rec in a quarter off of that."
Evanko also went on to point out that with the acquisition of Howden, Chart now provides more full solutions to customers with more equipment, instead of just selling individual tanks or blowers. While that is good in the long run, it can also extend the timing in between revenue recognition relative to when orders first come in.
Finally, Evanko noted that historically, less than 1% of orders have been cancelled. And in the nine months since the Howden acquisition, Chart's large and growing backlog has only seen a miniscule 0.19% cancellation rate.
Investors are overlooking the positives
If revenue and Ebitda can reflect the timing of revenue recognition, then investors may wish to gravitate toward Chart's orders and backlog as a better indication of the business.
It should be considered that Chart also gets very lumpy, big liquefied natural gas orders basically every year, but not every quarter, and the third quarter did not have a big LNG order.
So while orders "fell" 6.3% year over year on an exceptionally strong third-quarter 2022 and grew 6% quarter over quarter, when taking out big LNG orders, orders grew 2% year over year and a whopping 30% quarter over quarter. Meanwhile, the company's backlog grew 4.4% quarter over quarter, or a 19% annualized rate.
Meanwhile, Chart continues to reap cost synergies stemming from the Howden integration, with Ebitda margins of 21.7%, up 20 basis points relative to the prior quarter, despite delayed sales, and up a whopping 440 basis points relative to the prior year, pro-forma. Year to date, Chart has already reaped $135.4 million of cost synergies with Howden, on its way to $175 million by year-end and $250 million by year three.
Blockbuster guidance
Chart's pivot to full solutions, a higher percentage of "stickier" repair, service and leasing revenue and order visibility also enabled management to confidently give blockbuster guidance for 2024.
For 2024, management now sees $5.1 billion in revenue, $1.3 billion in adjusted Ebitda and at least $14 in earnings per share. This compares with just a $110 share price, meaning Chart trades for under 8 times next year's earnings estimates.
Investors either do not seem to trust management or may be worried over the company's debt, which totaled $4.077 billion at the end of the third quarter. That's high relative to Chart's $4.71 billion market cap.
However, Chart expects to pay down $340 million to $350 million in debt in the fourth quarter alone, helped by divestitures, and guided to $600 million in free cash flow for debt paydown next year.
Assuming Chart pays down $950 million of debt over the next year and hits its $1.3 billion Ebitda target, the stock trades at just a 6 times forward enterprise value/Ebitda ratio.
That seems quite cheap for a company growing by double digits and riding the long-term trends of global clean energy infrastructure. And it is why aggressive investors may want to give this beaten-down stock a look.
