Chart Industries: Boosting Our Fair Value Estimate to $200 From $180 per Share

After taking a deeper look at the successes and data points reported by Chart GTLS 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%.

Broadly, the opportunities with Howden and Chart combined still seem significant, and we think our revised estimates better capture its sizable opportunities. Chart’s management emphasized on the last quarterly call that gross margins have the potential to reach the mid-30s over the coming years compared with 31% this quarter, due to a combination of pricing power and reduced material costs. Another key factor is revenue mix skewing 70% toward project work versus build and ship. This mix shift is effectively capturing higher margins via providing a more complete solution with Howden.

Chart is already exceeding expectations with Howden, in our view. After four months of ownership, it has already achieved 55% of its of year-one cost synergy target of $150 million and 63% of its $175 million commercial synergies. The commercial synergies target is starting to look conservative, as Chart flagged a $20 billion pipeline of opportunities over the next 24 months, including $1 billion in orders that include both Howden and Chart products in the next 12 months. A win rate of 40%-50% on the $20 billion suggests $8 billion to $10 billion in orders over the next 24 months, meaning $1 billion in quarterly orders are here to stay for the time being—43 different partnership agreements have been expanded to include both Howden and Chart, and Chart expects 70% of the agreements to place orders in 2023. More than 500 different sites have been identified that include both Chart and Howden assets for targeted aftermarket service and repair opportunities.