Actions of Chart Industries, Inc. (New York Stock Exchange:GTLS) they have seen a big drop in recent days after a mega trade was not well received by investors. To understand where investors are coming from and judge the impact of the transaction about the business, I go back to June, when completed it was almost time to buy the dip.
back to summer
Chart Industries is a game about the energy transition, LNG in particular. For a long time, the company has positioned itself in this way. While it took a long time for the positioning to result in tangible sales and earnings growth, 2022 was the year the preparations came together, unfortunately for all the wrong reasons.
The business relied heavily on large orders, leading to uneven sales and profit trends. The company originally targeted 2020 sales at about $1.75 billion and earnings at between $5 and $8 per share. After a rough year, the company targeted 2021 sales at just $1.3 billion where earnings were originally seen at just $3 a share.
Despite this outlook, stocks rose to the $120 mark at the end of 2020, and then rose to the $200 mark in September of last year, when energy prices were already starting to rise. The stock fell to the $110 mark in February 2022 due to the outbreak of the Russian war, as the stock quickly recovered again. This was driven by a resilient outlook for 2022, which originally called for sales at a midpoint of $1.775 billion at which earnings were expected to be around $6 a share. With the stock trading at $180 in June of this year, it seemed too early to get involved, as the stock fell to the $150 mark that same month.
In the five months since my last take on Chart Industries, the company released second-quarter results in late June. Second quarter sales rose 25% to $404.8 million as adjusted earnings rose twenty-three cents to $0.88 per share. While the growth looks reasonable, the problem is that the midpoint of sales guidance has dropped to $1.76 billion, at which adjusted earnings are now seen at just $5.40 per share.
In October, the company aware Third quarter sales of $412.8 million as adjusted earnings of $1.49 per share were pretty strong. Reported sales understate the strength of the business with order intake of $729 million, resulting in a sky-high book-to-bill ratio as the order book doubled annually to more than $2.2 billion. The company again cut guidance for 2022, now seen at a midpoint of $1.67 billion in sales and earnings at $5.12 per share, as the company posted very strong guidance for 2023.
For the coming year, the company forecasts sales at a midpoint of $2.15 billion, with earnings forecast at a midpoint of $8 per share.
With 36 million shares trading at $240 at the time, the stock rose on the back of these results, the 2023 outlook, and higher intake. The company received an equity valuation of $8.6 billion. Including $500 million in net debt, the valuation came to $9.1 billion, equal to about 5 times sales and nearly 30 times future earnings.
a bomb deal
November 9, Chart Announced a $4.4 billion deal to acquire Howden, a provider of mission-critical air and gas handling products and services. Typical products to think about include compressors, blowers and fans, rotary heaters, and steam turbines. Three quarters of the deal will be paid for with debt and the rest with preferred stock.
Howden generates $1.8 billion in revenue, on which it posted an adjusted EBITDA of $340 million. This implies a purchase price of 2.5 times sales and around 13 times EBITDA, which is ahead of synergies. In addition to lower earnings multiples, the company sees huge synergies, pegged at $175 million in the first year, expected to grow to $250 million in the third year.
Net debt will rise to $3.8bn as leverage increases to an estimated 4.25x, which is high, but given the sector, it could be manageable. That said, there are also risks, as an economic downturn could affect energy prices and therefore also the order book.
Despite the lower sales multiple and the anticipation of big synergies, the stock took a major beating, essentially from $240 to $140 overnight, as the $100 move lower lowered the valuation of the company’s shares at $3.6 billion, nearly equal to Howden’s valuation in this deal.
The truth is that I don’t think the current movement is the right one. Chart Industries has focused on the energy transition as this deal creates diversification and scale. At the same time, the transaction results in leverage, and investors fear “diworsification,” hurting earnings multiples applied to the stock. Also, Chart hasn’t had much luck with deals in the past.
The reality is that the deal is likely to boost earnings per share tremendously, certainly if the synergies are realized. Depending on a lot of moving elements, I see potential for earnings to rise to $10 per share (or more), but these are estimates and pretty erratic earnings of course. If that is the case, valuations are quite low and today’s prices represent a great buying opportunity.
Right now I’m a bit confused. The movement is a bit big, some strategic questions can be asked and the leverage is high. On the other hand, the deal seems fair enough, certainly if synergies can be achieved, as the share price move feels like an overreaction.
Amidst these moving targets, a small speculative position in Chart Industries, Inc. might be the way to go here, although I have to stress the highly speculative element of the thesis here.