Company Reports

We think AI and data center demand offers a potentially sizable growth opportunity across our US E&P and US & Canadian midstream coverage list. We consider Chart Industries, Energy Transfer, Enbridge, Kinder Morgan, and TC Energy as undervalued ways to play this trend. Cheniere Energy and Williams are more fairly valued, while Antero, Range, and likely EQT (not covered) are obvious direct opportunities and appear expensive.

Chart Industries' first-quarter results were strong, in our view. Sales were up 17%, EBITDA was up 73%, and adjusted operating margin reached 18%, up 620 basis points over last year’s level. Gross margin is at 33% on an adjusted basis, up 320 basis points year over year, and we see further upside to the mid-30s in the near term. The earnings trajectory, supported by management’s reiteration of 2024 guidance, supports substantial stock price upside, even after an 8% upward move intraday as of this writing. Management reaffirmed guidance for revenue at a midpoint of $4.85 billion and EBITDA at a midpoint of $1.24 billion; both data points are well above PitchBook consensus estimate of $4.6 billion and $1.17 billion, respectively. Our estimates remain $4.9 billion and $1.24 billion. We expect to maintain our $200 fair value estimate and narrow moat rating.

Since 2020, Chart Industries has engaged in a successful strategic pivot toward expanding its specialty portfolio of products toward high-growth areas such as hydrogen and LNG. It made several attractive investments and joint ventures with key partners that enabled it to materially increase the amount of in-house content for larger projects, lowering costs and providing more control over delivery time frames. The greater degree of control over integrating its equipment and processes was also driving pricing power, lifting margins, and increasing customer switching costs. Three-year targets introduced at its 2022 analyst day included a 17%-plus CAGR on revenue, 25%-plus CAGR on EPS, and margin expansion of 300-600 basis points.

Chart Industries’ fourth-quarter results and 2024 guidance broadly confirmed our thesis that the stock is mispriced and remains deeply undervalued. The shares are up about 15% on Feb. 28 midday, but we still see further upside to our unchanged $200 fair value estimate. Our narrow moat rating is also unchanged. Chart’s management team continues to achieve its stated goals, as it has done consistently, and we think the market’s skepticism is unwarranted.

The Biden administration has announced that it has paused all new LNG project approvals, likely until after the election in November 2024. We expect the approvals will impact projects under consideration by the Federal Energy Regulatory Commission, or FERC, and the U.S. Department of Energy, or DOE. The announcement does not affect existing efforts already approved, meaning that U.S. LNG capacity is already on track to effectively double in the next few years considering projects under construction.

Media reports have picked up on leaked guidance for the hotly contested U.S. green hydrogen tax credit. While the rules have yet to be finalized, the initial reports point to slightly more restrictive guidance than hoped by many industry participants. Shares of hydrogen-exposed equities underperformed on Dec. 5, with the Global X Hydrogen exchange-traded fund down 2.9% versus the S&P 500 decline of 0.1%.

Chart's Analyst Day was valuable as it let us benchmark our forecast against the first medium-term forecast from Chart's management team including Howden. While we are leaving our $200 fair value estimate and narrow moat rating unchanged, management's forecast suggests potential further upside to our fair value estimate if all of its 2023-26 goals are fully achieved. We find this situation particularly compelling, as our estimates are already materially above consensus estimates, suggesting the market is deeply misunderstanding the stock. For example, per PitchBook, 2024 consensus estimates for revenue and EBITDA are $4.7 billion and $1.1 billion compared with our $5.2 billion and $1.3 billion forecast. We continue to think Chart's opportunities across LNG, hydrogen, carbon capture, and water treatment solutions remain sizable and unappreciated.

While Chart’s third-quarter results were weaker than we expected, we think the market’s 20% shellacking of the stock as of this writing is well overdone. After updating our model, we reaffirm our $200 fair value estimate and narrow moat. We consider the firm deeply undervalued.

Since 2020, Chart Industries has engaged in a successful strategic pivot toward expanding its specialty portfolio of products toward high-growth areas such as hydrogen and LNG. It made several attractive investments and joint ventures with key partners that enabled it to materially increase the amount of in-house content for larger projects, lowering costs and providing more control over delivery time frames. The greater degree of control over integrating its equipment and processes was also driving pricing power, lifting margins, and increasing customer switching costs. Three-year targets introduced at its 2022 analyst day included a 17%-plus CAGR on revenue, 25%-plus CAGR on EPS, and margin expansion of 300-600 basis points.

The U.S. Department of Energy, or DOE, recently announced $7 billion in funding for several key hydrogen hubs around the United States. These hubs are designed to help the U.S. administration achieve its goal of 10 million tons per year of hydrogen production by 2030. The effort was extremely competitive as nearly 80 bids were submitted in November 2022, before being whittled down to the seven eventual winners. The $7 billion for funding the hubs will now enter a negotiation stage. Collectively, the hubs are expected to produce about 3 million tons of hydrogen per year and eliminate 25 million tons of carbon dioxide emissions annually. None of our fair value estimates or moat ratings are affected.

After taking a deeper look at the successes and data points reported by Chart thus far related to its Howden deal, we are increasing our fair value estimate to $200 per share from $180. Our narrow moat and exemplary capital allocation ratings are unchanged. We now assume gross margins average 32% over the next five years, up from 30%, and revenue growth averages 42% over the same time frame compared with our earlier forecast of 35%.

Since 2020, Chart Industries has engaged in a very successful strategic pivot toward expanding its specialty portfolio of products toward high-growth areas such as hydrogen and LNG. It made several attractive investments and joint ventures with key partners that enabled it to materially increase the amount of in-house content for larger projects, lowering costs and providing more control over delivery time frames. The greater degree of control over integrating its equipment and processes was also driving pricing power, lifting margins, and increasing customer switching costs. Three-year targets introduced at its 2022 Analyst Day included a 17%-plus CAGR on revenue, 25%-plus CAGR on earnings per share, and margin expansion of 300-600 basis points.

Since 2020, Chart Industries has engaged in a very successful strategic pivot toward expanding its specialty portfolio of products toward high-growth areas such as hydrogen and LNG. It made several attractive investments and joint ventures with key partners that enabled it to materially increase the amount of in-house content for larger projects, lowering costs and providing more control over delivery time frames. The greater degree of control over integrating its equipment and processes was also driving pricing power, lifting margins, and increasing customer switching costs. Three-year targets introduced at its 2022 Analyst Day included a 17%-plus CAGR on revenue, 25%-plus CAGR on earnings per share, and margin expansion of 300-600 basis points.

Chart Industries' second-quarter results were very good. After updating our model, mainly to reflect slightly higher gross margins in 2023 and 2024 due to strong pricing, we've increased our fair value estimate to $180 per share from $165. Our narrow moat rating remains unchanged. Our revised EBITDA estimates stand at $787 million and $1.3 billion for 2023 and 2024, respectively, in line with management guidance. The firm has announced asset sales of $380 million to date, supporting its $500 million target related to the deal, and remains on track to reach 2.5-2.9 times net debt/EBITDA by mid-2024.

Chart Industries has agreed to sell its Roots business to Ingersoll Rand for $300 million. This is an excellent valuation, in our view, at a low teens EBITDA multiple. The business provides low-pressure compression and vacuum technologies, and its sale is a significant step toward achieving the planned $500 million in asset sales after completion of the Howden acquisition. We think Roots has fairly low growth prospects and can’t really be pivoted toward clean energy applications; we expect similar attributes associated with the remaining $200 million in asset sales. Given the small size of the transaction, we will maintain our $165 fair value estimate and narrow moat rating for Chart.

Since 2020, Chart Industries has engaged in a very successful strategic pivot toward expanding its specialty portfolio of products toward high-growth areas such as hydrogen and LNG. It made several attractive investments and joint ventures with key partners that enabled it to materially increase the amount of in-house content for larger projects, lowering costs and providing more control over delivery timeframes. The greater degree of control over integrating its equipment and processes was also driving pricing power, lifting margins, and increasing customer switching costs. Three-year targets introduced at its 2022 Analyst Day included a 17%-plus CAGR on revenue, 25%-plus CAGR on earnings per share, and margin expansion of 300-600 basis points.

Chart Industries’ first-quarter results were strong, as the integration of Howden (the deal was completed mid-March) is off to a healthy start. At first glance, we maintain our $165 per share fair value estimate and narrow moat rating. We think investors have been concerned about growth prospects, achieving synergies, and the quality of Howden’s business since the stock fell 50% immediately following the deal’s announcement in November 2022. To date, results tend to support that those concerns are exaggerated. We consider the stock to be undervalued. Full-year 2024 EBITDA (reflecting the first full year of combined operations) stands at $1.3 billion, matching our expectations, including expected synergies.

Chart Industries’ deal to acquire Howden closed on March 17. Since the closing date, Chart has announced several early successes on the commercial and cost synergies front, including the recent announcement of its expansion of the Hydrexia partnership. The Hydrexia partnership, originally with Howden, now includes Chart products and is specifically focused on delivering hydrogen refueling stations in Australia, New Zealand and Southeast Asia. The partnership, which has delivered over 40 stations already, now also benefits from Chart’s experience in obtaining regional hydrogen certifications for equipment. We think this is a good example of the positive outcomes of the deal for a newly expanded Chart. The expanded partnership is not material enough to move our $165 per share fair value estimate or narrow moat rating for Chart.

We are initiating coverage on Chart Industries with a fair value estimate of $165, a narrow moat rating, and an Exemplary capital allocation rating. We do see the firm as substantially undervalued at current prices, as the market remains concerned about the impact of the Howden deal on Chart's future prospects. In contrast, we believe that the Howden deal offers several material benefits that should drive improved profitability and growth going forward.

Since 2020, Chart Industries has engaged in a very successful strategic pivot toward expanding its specialty portfolio of products toward high-growth areas such as hydrogen and LNG. It made several attractive investments and joint ventures with key partners that enabled it to materially increase the amount of in-house content for larger projects, lowering costs and providing more control over delivery timeframes. The greater degree of control over integrating its equipment and processes was also driving pricing power, lifting margins, and increasing customer switching costs. Three-year targets introduced at its 2022 Analyst Day included a 17%-plus CAGR on revenue, 25%-plus CAGR on earnings per share, and margin expansion of 300-600 basis points.