It's been a great year for any lawyer or banker working in the field of mergers and acquisitions (M&A). The sheer volume of deals taking place this year has been stunning. Consider just one stat: In 2013, there was only one deal announced in excess of $25 billion (Verizon Communications Inc.'s (NYSE: VZ) move to regain the half of Verizon Wireless it did not own). Thus far in 2014, six deals worth $25 billion or more have been announced (not counting AbbVie's (Nasdaq: ABBV) deal for Shire (Nasdaq: SHPGY), which was terminated on Monday).
This deal, which came at a 37% premium to the prior day's closing price, values Dresser Rand at around 26 times projected 2015 profits, and around 2.4 times projected 2015 sales. Siemens' acquisition comes as little surprise to industry watchers. CEO Joe Kaeser has been reducing his company's energy operations in Europe, while telling an energy industry conference in Houston in June that "the U.S. is the place to be."
Siemens continues to prowl for other U.S.-based, shale-focused energy equipment targets. He's not alone. General Electric Co. (NYSE: GE) has signaled the same intention, having already made a pair of deals in this space over the past year, and private equity firm Kohlberg Kravis Roberts & Co. LP (NYSE: KKR) spent $3.9 billion in 2013 to acquire compressor maker Gardner Denver. In other words, Siemens' Kaeser shouldn't wait too long.
The question is, what companies might be on Siemens radar? "With the acquisition of Dresser-Rand by Siemens, Chart Industries, Inc. (Nasdaq: GTLS) becomes one of the few remaining stand-alone public companies in the shale energy/natural gas equipment space," note analysts at Lake Street Capital.
Chart is one of the top providers of storage and processing equipment in the field of liquefied natural gas. After Dresser-Rand's equipment pumps and processes oil and gas, a series of other steps are taken to prepare for transport and sale of the fuels.
For example, crude oil is slightly modified at the well-head to enable it to flow more smoothly through dedicated pipelines, where it is shipped to refineries that make gasoline, diesel, jet fuel and other distillates.
Natural gas is also shipped, either in gaseous or liquid form, to various end-stage processing sites. Chart Industries, selling a range of handling and storage equipment, is right there on the energy food chain. Chart has around $1.2 billion in sales and is roughly 40% of the size of Dresser-Rand. Still, it's large enough to help Siemens in its goal to become a one-stop shop to the key shale producers.
Why would Chart hold appeal? The company has "(1) a leading position in its product categories; (2) significant exposure to high-growth energy markets (~53% of revenue from energy infrastructure market); and (3) a growth rate twice DRC's (~15% vs ~8%)," said analysts at Lake Street Capital.
Meanwhile, after a precipitous plunge this year, shares of Chart hold solid value, trading for around 13 times projected 2015 profits, and 1.1 times projected 2015 sales. Note that those multiples are around half of what Siemens paid for Dresser, on an apples-to-apples basis, suggesting shares have 100% upside, to around $92. For reference, shares of Chart Industries fetched $130 a year ago.
In hindsight, it's not clear why this stock ever reached the $130 level. Back then, the forward multiples reflected the growth prospects of a hot software stock and not an industrial manufacturer. Chart had been able to boost sales 43% in 2011 and another 27% in 2012, but those were anomalies. In most years, investors should expect 10%-to-15% growth.
So what would Chart be worth even if Siemens (or other firms) didn't look to acquire the company? Well, per share profits appear poised to grow at a 20% pace as the company reaps margin gains from its under-utilized production facilities. (Analysts are formally modeling for 23% earnings per share growth in 2015). Applying a multiple of 20 on projected 2015 EPS suggests an upward move to $70, equating to a more modest 50% upside in the absence of any deal. Lake Street Capital has a $98 price target, which seems aggressive in my view, at least in the absence of any M&A.
Risks to Consider: The recent pullback in energy prices may chill the current M&A fever, at least until energy prices stabilize.
Action to Take --> The timing of an entry point is tricky. It's wise to avoid stocks that are about to deliver quarterly results (which come on October 30). Indeed, Chart has missed quarterly EPS forecasts by a few pennies on four straight occasions. And simply based on the potential of a deal, note that it is unlikely that Siemens can move very quickly to make an offer. The company has to complete the announced Dresser-Rand deal before it can bring out its checkbook again. Rivals such as GE may beat Siemens to the punch. Perhaps the best game plan is to focus on quarterly results, and be prepared to buy shares once that news has been digested.
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