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Chart Earnings: The Market’s Concerns Over Revenue Delays Is Overdone

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While Chart’s GTLS third-quarter results were weaker than we expected, we think the market’s 20% shellacking of the stock as of this writing is well overdone. After updating our model, we reaffirm our $200 fair value estimate and narrow moat. We consider the firm deeply undervalued.

At $898 million, Chart’s revenue was well below the $1.03 billion consensus estimate per PitchBook. The miss is primarily due to delays in revenue recognition due to supply chain challenges within Chart’s most important segment after Howden (over 30% of revenue), which is the repair, service, and leasing business. The revenue is expected to be recognized during 2024 instead. Chart was also able to announce $500 million in divestitures several months ahead of its original expectations. This accelerated its leverage goals of 2.5-2.9 times EBITDA by mid-2024 instead of late 2024 but resulted in lower revenue and earnings than expected. These two changes reduced Chart’s 2023 outlook to a revenue midpoint of $3.475 billion from $3.73 billion (approximtely $255 million reduction), and an EBITDA midpoint of $753 million compared with $795 million (a $42 million reduction).

Broadly, the stock price decline implies the market is assuming ongoing risks to backlog and revenue recognition throughout 2024 due to supply chain challenges. We expect the market is unusually sensitive, given the size of the Howden transaction and concerns over any market slowdown due in part to higher interest rates. We think the size of the stock pullback is well overdone considering the risks to fourth quarter revenue and 2024 guidance. Frankly, these types of changes to projects are fairly frequent and normal within Chart’s business and are typically driven by customers adding capabilities or tweaking a design to improve output versus Chart missteps. Our view is supported by Chart’s management reaffirming 2024 EBITDA guidance of $1.3 billion despite the 2023 shortfall. The shifted revenue would also support this forecast.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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Stephen Ellis

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Stephen Ellis is an energy and utilities strategist for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc., covering midstream companies. Ellis is a former member of Morningstar’s China Economic Committee, which provides research on the long-term outlook for the Chinese economy.

Before assuming his current role in 2017, he was director of equity research for financial services and a senior equity analyst. He is also a former editor of the Morningstar Opportunistic Investor newsletter and a former member of the Economic Moat Committee, a group of senior members of the equity research team responsible for reviewing all Economic MoatTM and Moat TrendTM ratings issued by Morningstar.

Prior to joining Morningstar in 2007, he worked as a freelance analyst for The Motley Fool and spent three years working in project and financial analysis for Environmental Systems Research Institute (ESRI), a supplier of geographic information system software and geodatabase management applications.

He holds a bachelor’s degree in business administration and a master’s degree in business administration from the University of Redlands.

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