I began following Chart Industries (GTLS) decades ago as a $40 million market value company with a 7% dividend back then. This company grew by participating in large projects. The problem is that the large growth projects in the natural gas industry are cyclical. This company specialized in supplying equipment to those projects and obviously has grown tremendously to the present time. Now, the company is large enough to address the cyclical aspects of its business comprehensively.
Now with a very upbeat third quarter report, the question remains is it different this time? Chart trades more on orders than it does on the current report because current earnings are largely fixed by the long lead times in this industry. Therefore, an assurance of less “big bottoms that crash the price” will make for a far brighter investment future.
There has always been diversification along the way. Some were successful and some were not. But the oil and gas cycle nearly always dominated that attempt to diversify because orders during the recovery grew very fast compared to just about any other business serviced. The rude awakening came yet again when orders from the oil and gas business dropped to zero for one quarter. The company’s other businesses allowed the company to survive such an event while planning for the next recovery. But this time around, the acquisitions were going to address that inevitable (cyclic) business drop.
Chart Industries has been using the generated cash flow to rapidly enter the “aftermarket” and maintenance business. The company has long been familiar with these businesses and they have begun to steady the earnings during times of business volatility that the oil and gas business is known for.
Source: Chart Industries October 2020 Investor Presentation
This company is actually a natural for clean energy projects. The immediate first step is a move to natural gas and liquified natural gas projects. As management has noted many times, natural gas and related products burn cleaner than many other fossil fuels. Therefore, the move to natural gas has often reduced pollution up to 20%. The result is in my home state of California a massive move by buses, commercial fleets, UPS, and much more to natural gas as a fuel. The technology is reliable and available without government assistance. Plus the cost of natural gas and related products is very low so the switch was obvious.
What is also slowly becoming apparent is that methane is a byproduct of natural processes like garbage dumps. So methane is slowly making its way into the renewable resource category out here as well. That begins to blur the lines between renewable and nonrenewable resources.
Source: Chart Industries October 2020 Investor Presentation
Another source of renewable energy that is just now gaining some traction is hydrogen. Until recently, the hydrogen market was relatively small and has had some considerable hurdles. Even though the hurdles remain, the market appears to have crossed the important $1 billion threshold. That size would begin to interest a company like Chart.
The key to all of this is that the company is investing in less cyclical markets. That will enable the company to get through oil and gas downturns in far better shape than the past. At least some of the downturn slack will be taken up by increasing maintenance business and the new “clean” fuels will provide a steady base. This is a departure from the past when much of the investment accelerated the oil and gas cycle.
Source: Chart Industries October 2020 Investor Presentation
Chart Industries has long dealt with the steps of various gasses in its business since inception. The acquisition of the distribution step shown above from Worthington Industries fits a company strength that has long been known in other areas of the business.
Chart focuses on the storage and distribution of bulk amounts of various gases. Given that focus, the acquisition from Worthington Industries makes a lot of sense. More importantly, the company has achieved a size where meaningful diversification away from boom-bust cycles is finally possible.
Source: Chart Industries October 2020 Investor Presentation
Generally, the addressable market size shown above after the acquisition is now large enough to justify entry costs for profitable opportunities. Note that this market size is actually quite small when compared to the liquid fuel market in general. But it fits into the fast growth future category for the company.
Generally, Chart saves costs by combining the sales and delivery efforts. The acquired plants themselves usually remain in operation and small in size. Each individual plant focuses on a small part of the Chart catalog of products to minimize costs. Usually, plant…
Read More: Chart Industries: It Really Is Different This Time (NASDAQ:GTLS)