Energy markets are getting attention as investors contemplate a potential recovery, and oil prices begin to retake some of their losses from the past 12 months.  Earlier this month ZachStocks featured Chesapeake Energy as a long idea which could benefit from an increase in natural gas pricing.  Today I want to look at a niche ancilary company which should see its business improve as a function of increased activity in natural gas markets, regardless of the price direction.

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Chart Industries Inc. (GTLS) is a relatively small company with a market cap of just under $600 million.  The firm specializes in providing equipment for the natural gas market, including tools for purification, liquefaction, distribution, storage and finally the end use.  GTLS is based out of Ohio, but has operations across the US and has built an international presence in Australia, China, the Czech Republic, Germany and the United Kingdom.

Long-term investors have become somewhat jaded as the stock dropped from a high in the mid $50’s last year, to a March low which was just over $5.00 per share.  Regardless of the quality of the company, it’s hard for any investor to stomach losing 90% of the value of a position.  But ironically during this tepid decline, the company actually remained profitable, putting up Earnings Per Share of anywhere from 64 cents in the December quarter to 71 cents in the most recent quarter ending June 31.  Analysts are currently expecting the company to earn $1.65 for 2009 and see that level decreasing to $1.16 next year.

As energy markets begin to improve, natural gas has seen its popularity increase (remember, natural gas is the cleanest burning fossil fuel, and with demands for electricity picking up we can expect many utilities to increase their NG consumption).  Regardless of the commodity price, political pressure towards greener production of energy will likely be very favorable for natural gas production levels.  As more gas is pulled from the ground, the need to transmit, liquefy, store, and distribute this gas will become even more intense and drive business for GTLS.  So I believe the assumptions for 2010 are relatively conservative and the company could quickly surprise investors with positive news.

The most recent quarter was a prime example of improving metrics for the company.  While earnings were admittedly down 7% compared to last year, the gross margins reflected success in recent cost cutting programs and the leaner structure will likely lead to future earnings improvements.  In fact, management increased earnings guidance for 2009 to a range of $1.50 to $1.70 compared to earlier guidance of $1.30-1.60.  Statements on the most recent press release were cautious, but optimistic:

Our cost reduction initiatives are driving strong financial performance despite continued weakness in order entry.  During the quarter we continued to implement aggressive cost containment actions to right-size our businesses, but we also continued to experience good project execution in our Energy and Chemicals (”E&C”) business. ~Sam Thomas, President and CEO

During the second quarter Chart Industries made two niche acquisitions to round our their portfolio of offerings.  The first was Chengdu Golden Phoenix Liquid Nitrogen Container Co., which is obviously a liquid nitrogen company in China.  The acquisition boosted the company’s biomedical division and while GTLS receives most of its revenues from energy customers, it also has a presence in biomedical, the food industry, entertainment, thermal testing, alternative fuels, and vacuum systems.  Hopefully over the coming years we will see the revenue stream become more diversified which will add to the stability of future revenues.

The second acquisition was a replacement parts supplier in Tulsa Oklahoma.  Both of these purchases were straight cash acquisitions which keeps investors from seeing their shares diluted.  At the end of the quarter, Chart had $205.4 million in cash which should give them plenty of flexibility for future strategic acquisitions.  While long-term debt is $243 million, the company is adequately capitalized and has positive cash flow to be able to service its debt for some time to come.

Over the past 9 months, the stock has rebounded from its climactic low and has built an attractive pattern.  Long-term investors may want to wait for a break above $22.75 in order to establish a full position, but with a relatively small capitalization, and the potential for a significant fundamental improvement in business, the stock could move very quickly.  It would only take one or two institutional investors of moderate size to move this name 20% or 30%.  The valuation is not cheap compared to analyst expectations, but I think over the next 9 months we could see expectations rise 30 to 40% (on 2010 earnings) and the stock trading into the mid-$30’s

FD: Author does not have a position in GTLS

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