Chart Industries (NASDAQ: GTLS) is a Cleveland based company that manufacturers standardized and custom products that serve cryogenic and gas processing applications. The company announced a new deal in China on Monday, May 12, 2014. Through 3Q13, the stock performed very well, in large part due to its rising business in China. However, the company fell short and sales slowed in 3Q13, causing the stock to sell off by over a third.
If its business in China reaccelerates, the stock could easily follow. This deal could represent a turnaround in that key part of the business.
Chart’s business in China
The company started production in China in 2005 in Changzhou. The rapidly growing infrastructure to support the use of LNG as a fuel has been Chart’s key driver. LNG (liquefied natural gas) is increasingly used to replace gasoline for use in heavy trucks, buses, and other types of vehicles. The vehicles are considered clean and eco-friendly. This is important in China where the government is focusing on cleaning up the environment, especially the air quality.
Chart supplies products that are used in LNG fueling stations and infrastructure. China needs to build this out before the LNG powered vehicles can come into greater use. Typically fleet vehicles like city buses and utility company trucks are the easiest to convert. The local cities or fleet owners can install one LNG fueling station at locations where vehicles are dispatched or housed.
Along those lines, natural gas in China has continued to grow as a fuel source for both power and use in vehicles. In 2013, natural gas consumption increased by 13.9% and accounted for 5.9% of all primary energy consumption, up 50 bp over the prior year. China is now the third largest consumer of natural gas in the world, with incremental supply coming from imports currently.
Since 2011, China has contributed significantly to the growth at Chart. Sales to China were $92 million, $149 million and $231 million in FY11, FY12 and FY13, respectively. Companywide sales over that period increased form $795 million to $1,177 million. The distribution and storage segment had a sales increase of 25% in 2013 largely to the LNG fixed and mobile fueling station growth in China.
The deal it announced on Monday for its distribution and storage business was a new agreement with Shandong Hanas New Energy. Under the agreement, Chart will supply equipment for 50 LNG fuel stations, including the installation and commissioning of equipment. It will complete the stations over the next 30 months. It expects a third of the stations will be ordered this year and Chart is exclusive supplier to Shandong Hanas through the duration of the contact. Chart’s subsidiary, Nanjing Xinye, is providing the fuel station dispensers that use its proprietary flow metering technology. The value of the deal is $35 million and builds on earlier success in the Chinese market.
Consensus Forecast and Valuation
Chart is by no means a cheap stock versus trailing or future earnings. The stock trades at 29.6x TTM earnings and at 18.2x NTM EPS. Its PEG ratio, a key metric for growth companies, is 1.11 which is reasonable. The current ROE is 10.75% and it has an ROA of 6% which are solid but by no means extraordinary for a manufacturer. The valuation is higher than most industrial stocks because of a better growth outlook, not operating performance.
So it terms of growth, current consensus is for revenue growth of 8% in FY14 and almost 14% in FY15. EPS is expected to increase to $3.08 in FY14 from $2.94 in FY13. The big jump is in FY15 earrings, where current consensus is for earnings of $4.01 per share.
The question to ask is why growth will accelerate after going through what looks like a pause. It is possible the rapid expansion of its business in China from 2011 – 2013 has led to a cooling off period while the market understands current capacity before planning new additions. The risk is that if the slowdown is not temporary and the double digit sales growth for FY15 becomes single digit growth. The stock has downside in this scenario as investors would likely no longer pay a high teens earnings multiple for more moderate growth.
This being said, the Street is likely valuing the share still more off of 2014 and is not yet focused on 2015. However, if throughout the year, order levels do increase and support the current forecast or lead to estimate increases for next year, the stock can turn around and increase in value.
The recent announcement in China, while somewhat small, is positive and could be an indication that LNG build out will continue to grow. Chart is heavily exposed to the energy market which accounts for 53% of sales. Globally, energy and especially LNG infrastructures that Chart produces products for should continue to grow. It is still in the early stages globally and Chart is a key beneficiary of the trends towards cleaner fuels and towards natural gas.
What do you think?
Photo Credit: Vichaya Kiatying-Angsulee
John has seven years of experience as an equity analyst following various stocks and sectors. As a senior equity analyst, he received awards from the Wall Street Journal and Financial Times for his writing.