Chart Industries: Booming Business (NYSE:GTLS)

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(Note: This was in the October 30, 2022 newsletter.)

Chart Branches (NYSE:GTLS) is growing just as fast as any other high-tech company out there. But unlike the high-tech crowd, this company generates profits and cash flow the deal that makes the current story very believable. Investors don’t have to wait for a distant future to benefit from the profitable business. Instead, there is now a very profitable business with a very bright future that promises much more profits. This company is a real disruptor because they have the money to show for their efforts.

Chart Industries stock price history and key valuation metrics

Chart Industries stock price history and key valuation metrics (Search Alpha website, October 30, 2022)

This company manufactures all kinds of natural gas based liquefaction and storage products. It has been diversifying away from the cyclical natural gas business for years. The company’s entry into the renewable energy and hot marijuana processing market has sparked the market’s imagination of many future gains. The big difference between this and many story stocks is the “lots of ongoing earnings.”

The stock price has been “on the spot” at quite high levels compared to earnings for some time. However, due to the small number of shares outstanding, this is a highly volatile stock. As such, the stock can make large moves in either direction for no business reason.

The cash difference

Any time you hear about a “disruptor” and lots of money “in the future,” you have to pull out the cash flow statement to determine if the company is truly an earnings generator that is a true current disruptor.

Chart Industries Q3 2022 Cash Flow Statement

Chart Industries Q3 2022 Cash Flow Statement (Chart Industries Q3 2022, 10-Q)

Growing businesses often require cash to “feed” growing working capital that is growing as fast as the business. That management resulted in record arrears and a 50% increase in earnings in fiscal 2023. So this business is growing very fast. Therefore, it is not surprising that the changes in assets and liabilities reflect a negative $97.4 million due to the likely working capital and associated growth required to support a rapidly growing business.

But that means the company actually generated about $148 million in cash prior to current asset and liability growth. With what is traditionally the biggest fourth quarter expected to be very strong earnings, generated cash is comfortable for this fast-growing company. Debt will be satisfactory. Traditionally, the fourth quarter reports as much or more than the other three quarters combined. This is similar to the retail store pattern.

Green products

Market imagination is attracted to Green Revolution type companies. This company has long been associated with major oil and gas projects. This is changing because the products can be used for really any gas (with modifications, of course). So, logically, the company started to get involved in new markets as soon as they became profitable.

Chart Industries Breakdown of Future New Market Outlook

Chart Industries Breakdown of Future New Market Outlook (Chart Industries Q3 2022, conference call slides)

The slide above shows some of the future potential that has attracted the market. In general, this company has a full range of liquefaction and storage products (along with dispensing capabilities) for every market, including the rapidly growing hydrogen market.

Because Chart is a relatively small company compared to the orders it receives and the projects it is involved in, orders may arrive inconsistently as different subsidiaries report good or bad months. Because of this factor, it typically takes a few months to spot a trend that needs to be corrected.

Quarterly financial reports can vary significantly based on the mix of products shipped, with no quarter of failure indicative of an issue. The fourth quarter is usually big enough that earnings should be sequentially higher. But it’s the only quarter like that. Sales are rarely (if ever) lost. However, delays often push sales to other quarters.

repair shop

Management has been looking for counter-cyclical companies to smooth the returns of this cyclical growth story. The repair business fits this requirement well.

Graph Industries Summary of repair business results

Graph Industries Summary of repair business results (Chart Industries Q3 2022, conference call slides)

The company has built a repair business because that business typically expands during economic downturns. That helps offset the largely cyclical nature of much of the company.

This company started about 50 years ago as a parts supplier to major natural gas companies. Even before the oil price crash of 2015, it was mainly a supplier to the natural gas industry with a small grocery store that showed little diversification.

Now the company has entered new growth markets and repair businesses, so the company is no longer dependent on the large natural gas projects to sustain and grow the business. The strategy has been extended to literally anything that requires gas in bulk. This meant that this company supplied many large-scale oxygen equipment to hospitals during the pandemic.

The next economic downturn will likely see a very different financial performance from this company.

debts

The company has about a third of its debt represented by convertible bonds. These bonds are currently convertible and are therefore part of current liabilities. The latest 10-Q referenced earlier contains the information on these bonds.

Traditionally, management has issued convertible bonds to “pay for” the acquisitions of small companies that expand the business. These bonds then convert as the company grows and the stock price rises.

The only time this strategy was delayed or didn’t work was around 2017 when some bonds matured and the stock price was below the bond’s conversion price. That was related to the big oil price crash, which literally drove large project orders to zero for a quarter. At the time, management refinanced that debt while waiving the right to convert the bonds.

These bonds are likely to be converted before their 2024 maturity date. But they will also likely remain outstanding until then because they are paying interest. The common shares do not pay a dividend. Therefore, it is beneficial for bondholders to hold onto it for as long as possible.

This waiting carries a small risk that the share price falls below the conversion price. That is unlikely given the current outlook. On the other hand, no one saw the challenges of fiscal 2020 ahead of time. These challenges have pushed the stock’s price into the teens (as shown on the Seeking Alpha website). Such an event would likely force the bonds to be refinanced into something less attractive to shareholders.

Once those bonds mature, the company will likely convert more debt into convertible bonds. This company generally buys companies with products that complement the product line, rather than developing many new products themselves. The company can look back on a very long and successful history of acquisitions.

The central theses

This company continues to grow at a rapid pace that shows no signs of slowing down.

Chart Industries Third Quarter 2022 Operating and Financial Summary

Chart Industries Third Quarter 2022 Operating and Financial Summary (Chart Industries Q3 2022 Conference Call Presentation)

The order backlog is at a record level. That means at least another good year as many of the products manufactured have very long lead times.

The company operates worldwide. Therefore, currency conversion issues arise from time to time.

Management trumpets gross sales margin because it’s an achievement. However, sales margins vary widely with the mix of products sold. Therefore, the margin can be different in each quarter without indicating an issue.

The large-scale natural gas project boom has been going on for several years. At some point in the future, there should be a cyclical downturn in this business. Although management has diversified from this business, it still accounts for a significant portion of order intake. A downturn would have a significant impact on the company’s growth rate.

This is a cyclical growth stock that has entered some extremely attractive growth markets. I like everything here except the share price. Potential investors are paying full price for the enticing growth prospects. Most likely, at some point in the future, a favorable opportunity to invest will arise. But right now, it looks like the stock is pretty expensive for those interested.

Rapid growth comes with its own risks, as the ability to increase production levels quickly can be daunting as a business grows. This company has mitigated that risk by maintaining management of the various acquisitions and keeping many small plants operating few products instead of a few large plants. So far this strategy has worked. But a loss of cost or quality control is a risk to rapid growth.

In summary, Chart has business interests in many new markets that are attracting investors. This is currently reflected in the share price. Management is top notch. However, the small number of outstanding shares suggests that the stock will continue to be extremely volatile. This suggests that investors should wait for a “downtrend” in the stock price to make an investment in the company. This stock can move 50% or more “because it’s Tuesday” and has nothing to do with business. Every investor must check the stock price development before investing.

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