Chart Industries: Healthcare Hints (NASDAQ:GTLS)

Chart Industries (GTLS) has a very long history of buying and selling divisions. The latest strategy has been to focus more on aspects of natural gas and natural gas liquids processing and handling. But management has always been aware of pricing.

Therefore, if a diversification strategy appears too pricey, then management will switch to the bargain way to diversify. Interestingly, management announced the intent to exit some of the healthcare and life science-related business. Cryoport (CYRX) purchased the biological business of Chart for $320 million. The sales price was nearly 4 times revenue.

Source: Chart Industries Investor Presentation August 25, 2020

For the company and its related businesses, that is a tremendous sales price. Chart has rarely, if ever paid that kind of premium for an acquisition. This deal knocks more than half of the long-term debt from the balance sheet and enables management to continue its hunt for more bargains in a fairly distressed market.

But for those looking for a view of the healthcare industry in general. Management actions hint that management received a good price and continues to receive a good price. It was not that long ago that management acquired VRV and paid for that acquisitions with the sale of a medical oxygen segment.

The careful investor would notice that management is receiving relatively high pricing for these “medical” sales and investing that money into areas with far lower costs of entry. In the process, management is opening up new opportunities and lessening the company dependence upon large customers and big projects. That could mean that this management views at least a segment of the healthcare market as fully priced. Therefore, this market is at a pricing level that indicates management can exit with decent sales prices while entering other markets that would supply shareholders with better gains.

Source: Chart Industries Investor Presentation August 25, 2020

The buyer Cryoport has the ability to integrate this business with other businesses that are similar to this business. That makes this a win-win deal for both sides. Chart Industries’ management never had the interest to put the time and effort into this division to make it successful. The strength of Chart Industries lies elsewhere. For that reason alone, this sale cannot be compared to what another medical company would sell for as Chart was nothing close to a medical company.

Any observer needs to realize that a company whose main business is the medical business is likely to make significant changes to this business to optimize operations. Despite the overlap of natural gas and natural gas handling, this business turned out to be a very different business for Chart that management did not want to spend the time on. This is one of the risks of diversification. Fortunately, the division is small enough that the company can recover quickly from this diversification effort while repaying debt.

Long-Term Debt Changes And Earnings Effects

Management had reported long-term debt at $736 million in the second quarter earnings press release. Therefore, the sale of less than 10% of revenue-generating products will cut long-term debt by nearly half. Most shareholders would regard this as a good deal.

The income per share for the next fiscal year is now forecast in the $3 per share range. Given that this company typically receives orders with fairly long lead times and the trauma that many industries went through during 2020, that earnings per share is a place to begin. The full year earnings from what is left after the divestiture (and given some optimization of operations) is now $2.25 for this fiscal year. At the end of the second quarter, full year guidance was in the $3.25 per share range. That means that chart will make up for the loss of this division rather quickly while reducing debt in the process.

Chart Industries generally deals with bulk type products. The division sold was a specialty division having its own training requirements and standalone plants. The business itself, like the previous oxygen tank division sale was a diversification effort that began to look very expensive besides requiring very different sales expertise and regulatory requirements (not to mention risk). Therefore, the exit appears to make a lot of financial sense for this company.

Most likely this stock will continue to trade based upon order rates. The larger projects that are the “meat and potatoes” of this business have delayed new orders as the coronavirus challenges have slowed things down in ways not foreseen ahead of time. However, orders are far stronger thanks to company diversification efforts during this time of low large project orders than they were a few years back when orders hit the big zero mark for one quarter.

The result of this progress is that the fast growth that shareholders are used to will likely resume beginning next year. The market expectations for resumed growth are demonstrated by the stock price jump since the beginning of the coronavirus challenges.

Source: Seeking Alpha Website October 1, 2020

Whether the stock price spends a year “treading water” or begins to appreciate will depend upon the order rates next year. Right now, this recovery appears to be a little more challenging than expected. However, by next year, things could be looking up considerably. In any event, the fast growth expected of this company appears ready to resume. That bodes well for the stock price in the future.

Moving On

The strategy to diversify away from large customer orders and large projects continues unabated.

Source: Chart Industries Investor Presentation August 25, 2020

As far as fueling stations (for example) go, Chart identified the customer as Shell (NYSE:RDS.A) (RDS.B) during the second quarter communications. Chart also went into detail about more natural gas fueling station possibilities as this has been a rapidly growing market for Chart Industries.

The reason for the growth in natural gas and natural gas liquids is that the technology exists, it is reliable, and it’s cheap. The use of natural gas often decreases pollution up to 20% from what it replaces. Therefore, the transition to natural gas represents a solid step forward in the pollution battle. Simply put, in the eyes of the business world, natural gas is winning the competition battle with green energy in much of the industrial world without subsidies from the government. If and when that situation changes materially, Chart Industries would report it as a change in the sales pace of the appropriate equipment.

Source: Chart Industries Investor Presentation August 25, 2020

Management will continue to concentrate on the “bulk” and industrial business. They will stay with the regulated business that they know best. The second slide shows the new opportunities in India that a recent acquisition opened up for the company. The bidding process has begun and a reasonable amount of orders should be anticipated.

Shareholders will have to wait and see how orders turn out for the next fiscal year. But it is quite clear that Mr. Market has a far better view of fiscal year 2021 that he had not too long ago.

The incoming orders are probably past the point where the current fiscal year will be affected materially. The order timeline is simply too long. However, the next fiscal year can still be affected quite a bit by incoming orders. This stock trades primarily on that order rate because this company has excellent visibility for the next 12 months of cash flow much of the time.

Large projects will get back on track as the coronavirus challenges fade. Those projects are almost never cancelled. But they can slow in extreme market conditions. Similarly, new large projects probably will not begin for roughly another year. But the market can now see the end of the coronavirus mess. That alone is very good news for this stock

Furthermore, management has emphasized the growth of the small order business and the repair business. There has also been an entry into the relatively new liquid hydrogen market as well as the legal marijuana market. The future appears extremely bright for this company.

Despite a lot of news to the contrary, the business is voting for natural gas with the budget dollars in a very big way. The result of this preference is a lot of rapidly growing natural gas markets and growing commercial use of natural gas. Until competing technologies come anywhere close to the ability of natural gas technologies both in cost and reliability as well as performance, natural gas use will be growing for the foreseeable future.

I analyze oil and gas companies and related companies like Chart Industries in my service, Oil & Gas Value Research, where I look for undervalued names in the oil and gas space. I break down everything you need to know about these companies – the balance sheet, competitive position and development prospects. This article is an example of what I do. But for Oil & Gas Value Research members, they get it first and they get analysis on some companies that is not published on the free site. Interested? Sign up here for a free two-week trial.

Disclosure: I am/we are long GTLS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Disclaimer: I am not an investment advisor, and this article is not meant to be a recommendation of the purchase or sale of stock. Investors are advised to review all company documents and press releases to see if the company fits their own investment qualifications.

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