| June 7
June 7 What a difference a decade makes.
Ten years ago, Chart Industries Inc was on the
verge of bankruptcy after taking on too much debt during a spree
of acquisitions that included an equipment maker for storing
cryogenic liquids like liquefied natural gas.
Today, those products, as well as others that are used to
make, transport and store LNG, have made Chart a winner in the
U.S. shale gas boom and transformed the company into a darling
of those seeking to cash in on the push to use natural gas as a
fuel for transportation and industry.
Over the last few years, investment firms including Artisan
Partners Asset Management Inc, Vanguard and BlackRock
have acquired stakes of more than 5 percent in Chart,
and they have enjoyed quite a ride. The stock has doubled in the
last two years, including a 43 percent gain in 2013 alone. Some
on the Street have signaled that it may be time to take profits,
but big hitters in the stock are sticking with it.
"We think this is really just beginning," said Jim Canty, a
portfolio manager with Clough Capital Partners in Boston,
calling Chart "close to a pure play on the natural gas boom."
The rapid growth in shale gas output thanks to hydraulic
fracturing has brought new investment in plants to produce LNG
for both domestic and overseas consumption. But to move natural
gas, it first must be supercooled into liquid form.
Enter Chart, which makes heat exchangers and tanks used in
making and storing LNG. The company's products are also used in
LNG fueling stations, which companies like Clean Energy Fuels
, ENN Group and Royal Dutch Shell Plc are
building in the United States for the small but growing number
of natural gas-fueled trucks. Chart also make tanks that are
used on those vehicles, rounding out its unique presence all
along the LNG-for-transport supply chain.
Chart, which has a market capitalization of more than $2.8
billion, is the No. 1 or 2 supplier in all of its main product
lines and has little direct competition among publicly traded
companies, according to analysts.
Sumitomo, Linde, Air Liquide,
Air Products & Chemicals, Fuel Systems Solutions Inc
and Westport Technologies compete with Chart
in some areas, but many are also Chart customers.
Each of those stocks has gained this year, most in the
double digits. But still those increases pale before Chart's
more than 40 percent rise.
Many of its competitors are larger and have more financial
resources than Chart. But barriers to entry are high in the LNG
equipment industry, analysts said, because of the complexity of
cooling gas to 260 degrees below zero Fahrenheit and then
storing it. As a result, Chart is sometimes raised as a
potential takeover target for General Electric, in
particular, as the conglomerate has bulked up its oil and gas
equipment division, most recently with its deal to buy oilfield
pump maker Lufkin Industries.
Chart is also becoming a major player in China, which is
farther along in its adoption of natural gas as a transportation
fuel. The company earlier this year landed two contracts worth a
combined $85 million to provide equipment to PetroChina Co Ltd
"You are sitting on a relatively small company that is right
at the center of one of the primary trends in world energy,"
said Jonathan Compton, managing director of London-based Bedlam
Asset Management, which has more than $700 million under
management and began buying Chart stock more than a year ago.
"You can't deny that the stock price is pretty fully valued,
but you have got a huge number of imperatives behind this
ROOM TO RUN?
Chart shares, which trade at more than 20 times analysts'
expectations for 2014 earnings, are relatively expensive. The
average multiple for companies in the industrial machinery
industry is about 13.5, according to Thomson Reuters data.
And some investors, such as Wells Fargo, have decreased
sizeable positions in the past year.
The stock should be trading at $57.80, far below Thursday's
closing price of $95.04, according to Thomson Reuters StarMine's
intrinsic value model, which considers analysts' growth
estimates for five years and then projects that growth
trajectory over a longer period of time.
Bedlam's Compton said analysts are underestimating the
company's earnings potential over the next three years, though
he added that quarterly numbers could be "lumpy" given that
revenue from big projects will vary from quarter to quarter.
Longdley Zephirin, an analyst at the The Zephirin Group,
estimates Chart is overvalued by about 30 percent and recommends
investors take profits. A slowdown in orders from PetroChina
after this year's build out of fuel stations, storage tanks and
trailers for LNG could trigger a selloff, he said.
Chart expects additional orders from PetroChina and said the
company would increase its market share in China, Chief
Executive Sam Thomas told analysts in an April conference call.
He added, though, that the Chinese market is competitive.
There are other risks as well.
More than a dozen companies are seeking permission from the
U.S. Energy Department to send LNG abroad, but some lawmakers
have warned the nation risks trading away the economic advantage
of its abundant natural gas reserves if it approves unlimited
If there are delays in permitting liquefaction plants or the
rollout of LNG-fueled trucks slows, Chart could start to look
like less of a sure bet.
The adoption of natural gas as a transportation fuel "may
not happen in the accelerated timeframe that the stock may be
anticipating," said Colin Rusch, an analyst with Northland
Yet many on Wall Street believe Chart is still a good buy.
Of sixteen analysts surveyed by Thomson Reuters I/B/E/S, 11 have
"buy" or "strong buy" recommendations, while the remaining five
rate the stock a "hold." Zephirin, who has a "sell" rating, is
not included in that data.
Analysts' mean price target is $93.21, slightly below its
current level. The highest target price is $114 by Raymond James
analyst Pavel Molchanov, who initiated coverage of the stock
last month with an "outperform" rating.
Clough Capital, which has about $4.2 billion under
management, bought Chart stock a little more than a year ago and
had 130,800 shares at the end of the first quarter. The firm has
no plans to back out now, according to Canty.
"We think we can hold it for multiple years," he said.