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The following segment was excerpted from this fund letter.
Chart Industries, Inc. (NYSE:GTLS)
We initiated a position in Chart Industries, Inc., a leading global manufacturer of highly engineered cryogenic equipment used in liquid gas supply chains supporting industrial gas, natural gas, liquified natural gas (LNG), and emerging clean energy end markets.
Chart’s primary products are heat exchangers and cryogenic storage vessels supported by upfront engineering, service, and repair. CEO Jill Evanko took over a more cyclical fossil-fuel-focused company in mid-2018 and revamped the business by leveraging strong market positioning in key cryogenic technology and deploying strategic capital to create a lean picks and shovels supplier serving not only legacy Industrial gas and LNG customers, but also Specialty Markets such as hydrogen, carbon capture, water treatment, and food & beverage.
This broader end-market focus has led to several first-of-a-kind orders and customer wins, with an impressive 402 new customers added in 2021. Jill also emphasized and expanded a repair, service, and leasing business with long-term contracts that provide stable recurring revenue streams. Chart maintains high market share given its long history (over 100 years!) of operations, depth and breadth of quality product and solutions (87% of products include Chart’s intellectual property), and global operating footprint.
Chart is also one of a few companies that can make brazed-aluminum heat exchangers, a key component in liquefaction processes, and has the two largest brazing furnaces in the world.
At its early 2022 investor day, the company released 2025 targets of greater than 17% revenue CAGR and greater than 25% EPS CAGR from 2022 levels driven principally by LNG and Specialty Markets growth. The world’s limited investment in natural gas and LNG infrastructure over the past decade, exposed by the current Russia-Ukraine conflict, and a growing mentality towards cleaner and greener, both play into Chart’s core capabilities.
Within LNG, Chart is benefiting from strong demand for large-scale export terminals, small/utility scale projects, and infrastructure equipment. Within Specialty Markets, the fastest growing and highest margin segment, global decarbonization and sustainability trends will drive increased hydrogen, carbon capture, and water treatment demand, with segment revenues expected to increase from $433 million in 2021 to upwards of $1 billion over the next several years.
We believe we are buying the stock at a very reasonable multiple of 2023 EBITDA, and that the company can exceed its 2025 targets and continue to grow revenues at a mid- to high single-digit CAGR, and EBITDA at a faster clip through the end of the decade. Given its capital-light manufacturing model, the company will produce meaningful free cash flow (mid-teens % of revenues) to use for strategic M&A and returning capital to shareholders.
We believe Chart can compound cash flow at a mid-teens rate through the end of the decade with a demand profile driven more by customers’ long-term investment decisions and less by near-term macroeconomic factors, making it a great addition to our Industrials holdings and existing portfolio.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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