GTLS - Chart Industries: Joint Venture Or Partnership Time

2023-07-25 07:00:00 ET

Summary

• Partnerships, collaborations, and joint ventures apparently will replace the Chart Industries, Inc. acquisition strategy for the time being.
• Chart Industries deleveraging is on schedule.
• The announcement of the Roots business sale should lead to an acceleration of the deleveraging process.
• The collaborations, joint ventures, and partnerships may put some of these smaller companies in play as potential acquisitions.
• The possibilities of acquisitions of partners appear to be behind management attempts to accelerate the deleveraging process.

Chart Industries, Inc. ( GTLS ) management "promised" that no material acquisitions would be made until the leverage comes down. Now it is unclear if that means no acquisitions period or just no significant acquisitions. Sometimes the actual implementation of a "promise" is different (slightly) from the wording. But what does appear to be happening is a close coordination with industry partners to get to the same place until that leverage comes down. This may keep the company in the leadership position of some very "hot" markets to achieve the same result as an acquisition.

Recently, Chart announced an expansion of the partnership with Kathairos to go after more methane emissions reduction business possibilities. Given the historical pace of acquisitions that were happening until the Howden acquisition, that pace is now likely to result in a lot of partnerships in the future. This would enable the company to keep up its record of rapid growth for some time to come.

Traditionally, this management purchases companies that have new equipment and technology rather than spending a lot on research and development. The success of this effort lies with the fact that management often keeps the acquired company management while combining sales efforts, as necessary. The combined sales efforts result in a "one-stop-shop" effect that so far appears to result in far more sales than would be the case had the acquisition not occurred.

The retention of acquired management reduces the failure rate of acquisitions dramatically. It also means that Chart essentially runs with a decentralized management model similar to Berkshire Hathaway ( BRK.A , BRK.B ).

But management needed a model revision because the Howden acquisition was so large that debt needs to be reduced first. Therefore, partnerships and joint ventures appear to be "the order of the day" until "business as usual" can resume.

Deleveraging

The latest update from management shows that deleveraging is running according to schedule so far.

(Note: that management issued an update to this on June 15, 2023. Not much changed but they continue to periodically update the market with the same message.)

Since management knows the market is very concerned about this, management provides a steady source of releases to keep the market current on the deleveraging progress.

The two specific divestitures were not in the actual deleveraging pathway shown elsewhere in the original agreement. But were instead noted as an "extra" that would aid in deleveraging goals if achieved.

Then when management announced the sale of its Roots business to Ingersoll Rand ( IR ), this would move forward the deleveraging process in a positive way. When the transaction closes, the $300 million of approximate receipts would knock (roughly) about a quarter point off the leverage ratio.

The big deal about the leverage ratio reduction is it would immediately fall into the 3's instead of being more than 4. That is a big psychological deal oftentimes (even if it is in the high 3s). The deal also gives some credence to the market that another transaction (for management to achieve that $500 million goal) is reasonable and probably will happen sooner rather than later.

These sales to aid the deleveraging process would then place management in a position to say they are ahead of schedule (which the market would just love) because the deleveraging guidance deliberately did not assume any sales "just in case."

Other Efforts

Management also announced a collaboration with FuelCell Energy, Inc. ( FCEL ). This joint effort will focus upon decarbonization and hydrogen technologies. In the short term, these agreements will likely work just as well as an acquisition because the prime benefits are usually found in the joint sales efforts.

Now, the effect of a joint effort may put some of these smaller companies into "play" as potential acquisition candidates in the future. A venture in any form with a far larger, more credible company often results in a higher valuation in the eyes of the market.

Before, Chart acquired a lot of these companies before they attracted attention from elsewhere. So, long term, investors will need to assess how the new arrangement works out for Chart.

Synergies Speed Up The Process

The faster the company can deleverage, the sooner the company will be able to acquire products and therefore obtain full control of the product future.

These orders appear to imply the fiscal next year will be better than expected. Chart has long-lead-times. Therefore, the current fiscal year is probably largely in place unless a material number of orders get delayed into the fiscal first quarter of the following year.

But fiscal year 2024 is probably still "in play." So, management is doing what it can to assure the market of the benefits of the acquisition. This management appears to be conservative enough to allow for guidance increase in fiscal year 2024.

This is important because this stock does trade heavily based upon order intake. Therefore, a continuation of the record order intake trend that is a part of the rapidly growing company history is a psychological milestone that will be overcome the way management is doing things.

It looks like at the expense of the initial stock price fall, management has put itself in a position to have positive news steadily released until the market no longer worries about the high financial leverage.

Key Ideas

Chart Industries, Inc.'s management appears to have done everything it can to aid in the stock price recovery following the initial news of leveraging-up of the company to acquire Howden. The market clearly hated all that leverage.

Management typically updates investors twice a month (one way or another). This stops rumors from ever taking hold. Now news does not change all that much in two weeks' time. However, the purpose is to reassure the market that the company remains on track with the original plan. Mr. Market worries a lot about leverage and can worry uncontrollably about some of the craziest things without these updates.

But one of the risks of a successful record of acquisitions appears to be management's tendency to try ever larger acquisitions. Unfortunately risks of larger acquisitions succeeding are not as great as small ones (as a general rule).

However, management has allowed acquired managements to remain in place and continue to do business as they have before. The major change in acquisitions is that sales efforts are combined when necessary to achieve greater sales than the two entities did when they were independent.

In the meantime, management apparently intends to do joint ventures and collaborations until acquisitions can resume. In the short term, this looks like an excellent solution. However, the long-term effects remain to be seen. Because of the long-term effects, management is likely to push hard to accelerate deleveraging so that the long-term risks do not become apparent to the market.

Chart Industries, Inc. stock is a speculative strong buy consideration due to the financial leverage and the sheer size of the acquisition. Management has given itself every chance to succeed by retaining the acquired management and by adding the joint sales effort. Still, this volatile stock Chart Industries, Inc. is probably only for more venturesome investors to consider.

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