Undervalued by 44%, This Stock Is a Buy for Long-Term Investors

We think artificial intelligence and data center demand offers sizable growth opportunities for companies beyond the technology sector. Case in point: Chart Industries GTLS. Its carbon capture products stand to benefit from data center and AI demand. In fact, Chart is one of Morningstar’s 5 Undervalued Energy Stocks to Play the AI Data Center Demand Boom. Only risk-tolerant investors should apply, though: This small-growth stock can be volatile. In fact, it is down nearly 30% in the last month alone, after management announced timing shifts on new orders that led to reduced 2024 guidance. But we think the volatility provides investors with a great investment opportunity. Chart is also among Morningstar chief US market strategist Dave Sekera’s 5 Cheap Stocks to Buy From an Attractive Part of the Market.

Chart Industries has pivoted to expanding its specialty portfolio of products into high-growth areas such as hydrogen and liquefied natural gas. It has made several attractive investments and joint ventures with key partners that have enabled it to materially increase the amount of in-house content for larger projects, lowering costs and providing more control over delivery time frames. This also drives pricing power, lifts margins, and increases customer switching costs. The acquisition of Howden in 2023 effectively doubled Chart’s size. Sales synergies are close to $1 billion already, compared with the 2026 target of $350 million. Over $1 billion in incremental sales seems possible across the next few years. Growth opportunities exist in fast-growing areas including aerospace, cannabis, water treatment, data centers, and hydrogen.

Key Morningstar Metrics for Chart Industries

• Fair Value Estimate: $200
• Star Rating: 4 Stars
• Economic Moat Rating: Narrow
• Uncertainty Rating: Very High

Economic Moat Rating

Chart’s narrow economic moat is based on switching costs. The company’s products are designed to be mission-critical and last for decades. The stickiness of this equipment is strengthened and made more profitable by highly lucrative service contracts that contain strong inflationary protections and are used to ensure performance optimization while reducing maintenance costs. Customers strongly prefer Chart to handle this type of work, given the complexity of the equipment and the administrative headaches of dealing with multiple contractors. We consider the combination of specialty products and aftermarket revenue to be among the most profitable areas for Chart. With a materially larger aftermarket contribution following the Howden acquisition, we expect returns on invested capital to average 15% over the next five years, well ahead of Chart’s cost of capital.

Read more about Chart’s moat rating.

Fair Value Estimate for Chart Stock

Our fair value estimate implies a 2024 enterprise value/EBITDA multiple of about 11.4 times, which includes a full year of Howden contributions. Newly expanded opportunities across hydrogen, carbon capture, and water treatment and near-term visibility for Big LNG work continue to be very strong, supporting mid- to high-teens medium-term revenue growth for the specialty segment. On a consolidated basis, we expect revenue growth to average 19% annually over the next five years but be closer to 11% in 2027 and 2028 after the initial benefits from Howden flow through. We expect operating margin to reflect the improved mix and pricing shifts, increasing to 18% by 2028 from 7% in 2022 before Howden.

Read more about Chart’s fair value estimate.

Risk and Uncertainty

Aside from the acquisition-related and financial risks introduced by Howden, which are high, Chart targets several specialty markets that are rapidly growing, and future market and competitive conditions are highly uncertain. Examples include hydrogen liquefaction, transport, and storage, industrial-scale carbon capture, LNG trucking, cannabis, and rocket fuel and private space travel. As government funding is particularly important for the early-stage hydrogen market, this raises the risk that governments can select technology winners and locally favored suppliers, locking out Chart from key markets. Chart faced lawsuits related to its cryobiological business, which it sold in 2020, eventually accruing costs of nearly $306 million and net $73 million after insurance recoveries. It expects to recover about one fourth of the net costs from other third parties.

Read more about Chart’s risk and uncertainty.

Chart Bulls Say

• Chart is an enormous free cash flow generator, with a historical free cash flow margin well above 80%. It targets 90%-plus after acquiring Howden.
• Higher expected content levels per project and an increased reliance on Chart-developed processes should lead to greater pricing power and margins over time.
• The significant increase in US LNG export capacity through the end of the decade is expected to drive large amounts of Big LNG orders, which can be several hundred million dollars per project.

Chart Bears Say

• The Howden acquisition carries materially more financial and execution risk than any prior deal. Chart invested about $450 million in deals during 2020-22, while Howden is almost 10 times those investments.
• Chart’s pricing increases typically lag increases in raw material costs (stainless steel, aluminum, carbon steel), hurting short-term margins.
• Howden’s products (excluding aftermarket service) appear significantly less profitable than Chart’s, raising pricing power concerns.

This article was compiled by Susan Dziubinski and Sylvia Hauser.