The Energy Information Administration (EIA) just published its 2014 Energy Outlook report and predicted that America's gas production, already at record levels, will increase by another 56% by 2040.
Kinder Morgan Energy Partners (NYSE: KMP) is projecting a 36% increase in natural gas demand over the next decade led by three factors: LNG exports, power plants switching to gas, and a boom in natural gas liquids (NGLs) such as propane, ethane and butane.
Those NGLs are expected to feed a booming petrochemical industry, which is investing $176 billion into construction or expansion of 148 facilities and necessary pipeline infrastructure on the Gulf Coast to take advantage of these feedstocks.
The Kinder Morgan family of companies has a massive $31.4 billion in current and planned projects to take advantage of this and several other energy megatrends. As I've said numerous times, Kinder Morgan represents one of America's best energy blue chips, and income investors can expect decades of continued distribution growth and market outperformance.
But what if I told you there was a small-cap energy growth company who stood to profit from these trends as well. What if this company were currently undervalued, a tempting takeover target, and expected to grow earnings at 22.4% annually for the next decade?
I would argue that such a company should be on every growth investor's radar, and that company is Chart Industries: (GTLS -0.39%)
Chart Industries: terrific growth potential you've never heard of
Chart Industries is a $2.4 billion Ohio-based specialty metal fabricator that specializes in three areas.
- Biomedical: oxygen generation and cryogenic storage for biological samples, which makes up 23% of sales.
- Energy and chemicals: industrial cooling systems and natural gas processing and cryogenic capabilities, accounting for 27% of revenues.
- Distribution and storage: of industrial gases and liquid natural gas. This accounts for 50% of sales.
As this chart shows Chart Industries has been one of the best performers of the last decade. In fact, its 22.9% annual returns have more than tripled the market's 7% performance.
The 45% drop from its highs came after announcing poor quarterly results of -3% revenue growth and a 23% earnings decline due to weakness in its biomedical segment which saw sales fall 21%. Sixty-two percent of that fall was due to terrible weather, the rest due to reimbursement pressure on Chart's respiratory therapy systems.
I believe the market overreacted to these results and two energy growth catalysts will help drive strong earnings growth over the next decade.
These catalysts are growth in natural gas processing and LNG systems, both industrial scale (LNG export terminals) and LNG to fuel vehicles.
Chart Industries is a partner of Bechtel, a major player in building LNG export terminals around the world. Such projects are being built in Australia, the west coast of Canada, and 20 proposed sites in the US, mainly along the Gulf Coast.
However, a potentially larger growth area for Chart may be in LNG as fuel for vehicles. In the US Chart signed a deal with a major oil company to build 100 LNG fueling stations at truck stops owned by Travel Centers of America.
Domestic LNG demand is expected to increase from 12 stations built in 2012 to 50 by 2015, which will increase demand for LNG storage tanks from 750 to 5,000.
International LNG, especially in China, represents Chart's best growth prospects which is why its investing $80 million into expanding operations there. Through 2015 China is expected to build 7,500 LNG stations requiring 350,000 LNG storage tanks.
This represents an immense growth runway for this small, fast growing company, and after its recent price decline, I believe Chart Industries to be substantially undervalued.
Using analysts 10-year EPS growth projections of 22.4%, assuming earnings growth slows to half of that for the next decade, and discounting cash flows by 9.1% (stock market's 142 year annual total return) I calculate a fair value for Chart Industries of $133.99. This represents a 41% margin of safety and may be why German engineering giant Siemens (SIEGY 0.35%) may be interested in acquiring Chart Industries.
Siemens CEO Joe Kaeser recently said his company was interested in entering the US natural gas market, stating, "Our firepower is huge, obviously, if you look at the liquidity, the cash we generate and the rating we've got."
Indeed, with $16.8 billion in cash and $5.1 billion in annual levered free cash flow (cash flow adjusted for debt payments) Siemens could easily afford Chart Industries' $2.4 billion market valuation.
I wouldn't advise investing in companies purely on acquisition hopes, but I think with Chart Industries the investment thesis is clear, and potential investors should know companies such as Siemens might think so as well.
Foolish takeaway
America's energy boom is a multifaceted cornucopia of long-term wealth building potential. Chart Industries represents a great undervalued small-cap growth story. It's a pick and shovel provider whose exposure to LNG exports, international vehicular LNG, and natural gas processing markets could make it one of the best investments of the next decade.
