I now own GTLS, want to run through the valuation piece as a follow up on the write up from a week ago.

1. cash return: taking a conservative stand, with 9m cash flow, taking out capex, you get 70m cash, divided by EV about 500M, this gives you a 14%, not too bad;

2. valuation:

a. without any tangible shareholder equity, using just fcf, assuming a 3% growth rate and 15% discount rate, you get a 10yr discounted cash valuation of 389M;

b. use the same lean 3% perpetuity growth rate and 15% discount rate, arrive at a perpetuity value of 193M;

c. total valuation ~580M, about 20% above current market cap. 

This is obviously not a huge MOS.  however, it appears upside outweighs downside with the following observations:

1. company’s growth rate way above 3% in last 5 years, driving by both E/C and D/S segment.  operation efficiency improved notably since it emerges from BK in 2003.  most of the top line growth flows to bottom line;

2. macro trend of natural gas/oil (LNG) storage needs benefit the company a great deal given its leadership position in the field;

3. a few potential large orders in 1st half 2010, and 3rd quarter result is hurt by restructure charge as well as use of contract labors;

4. also as a downside risk, the company was able to weather the recession well due to its very strong order backlog, which is consumed rapidly over the last few quarters.  Some signs of improvement was shown in the most recent quarter, order picks up by some 20%+. 

5. I really liked GTLS’s operation improvement over the last few years and how its management is able to manage the cost effectively going into the recession.  

GTLS is a real good company at more or less fair price… with some potential catalyst.  The downside risk of not having sufficient MOS is supported by the few catalyst, a macro economic downturn and continuous credit market deterioration would certainly drive GTLS back down, will keep an eys on its Feb. Q.

Commercial REIT is not one where to be today: overleveraging over the last few years, frozen credit market, falling property price, lack of (if any) active transactions. 

With that I am taking a look at MPG and BEE, with the intent to compare them to the success story – i.e. GGWPQ.  General growth properties has appreciated from 0.5 to more than 10 over the last six months, therefore going back to its book and see what it was dealing with would help one to learn something for the future.

The table below summarizes and compares the three firms for their most recent 10Q filing:

All numbers in mil except # shares	MPG	BEE	GGWPQ
	Sept09	Sept09	Sept09
Income
Rev	126	187	760
Exp	169	227	559
Interest	68	40	326
Depreciation &  Amortization	38	38	185
Impairment	6	30	61
# shares outstanding	48	75
Cash Flow(from operation, 9M)	2.5	30	671
Market Cap	69	132	3,070
Balance Sheet
Asset, total	4171	2793	29042
Investment in Real Estate	3689	2321	26697
Liability, total	4694	2139	27310
Equity	-522	650	1574
10 year data
Revenue	196-547	565-974	1270-3361
Gross profit	137-332	…248
Equity	343- (-460)	139-627	1670-1549

MPG is not generating a lot of revenue with its asset at hand, same goes free cash flow, its balance book is in worst shape among the three.  A careful review of the 10Q illustrate that there are multiple mortgage loans that is coming due in 2010, the company will need a lot of luck to stay afloat.  It has defaulted a few properties already and has taken losses on the defaulted properties.  Although the company’s stock is at very depressed level, I personally do not think the worst is yet over.  All in all, it does not appear to be a first tier REIT, something you would want to own for a long long time. 

BEE is in slightly better shape, it generated significant operation cash flow in both 08 09, but much was consumed by Capex.  Its properties are mostly high end hotels, which it was able to sell often and even realized some profit over the last few quarters.  It has a few loan due coming up in 2010, but the fine print says it has the option of 1 yr extension if needed. High end properties typically do not falter as badly as their counter party, but the other side of coin goes true for revenue also, there is much more severe reduction in revenue for BEE.  So for BEE, the problem is less dire, it can still jaggle around to make ends meet and given time, with credit market open up, it would be in a better situation.

GGWPQ generates tons of cash, consider six month ago it only had an market cap of a couple of hundred million, and a book equity of 1.6 billion, the issue was obviously not on the book, rather with the leverage, terms of the debt to be exact.  I also noticed GGWPQ put a large amount into its provision for loss in its income statement a few quarters back, largely depressed its net income number, GGWPQ, clearly had the asset, income stream to come out ok.  That being said, at the current price tag of 3.07 billion, anyone with the right state of mind would not touch it with a ten feet pole .

In a nutshell, that is a quick analysis of the three firms.  This is a very crude draft so any feedback, comments you have is more than welcome. 

Disclosure:  I long BEE shares at time of this writing.

Chart Industries, Inc. manufactures and supplies engineered equipment used in the production, storage, and end-use of hydrocarbon and industrial gases in the United States and internationally. The company operates through three segments: Energy & Chemicals (E&C), Distribution and Storage (D&S), and BioMedical, based on the most recent 10K, these three segments account for 42, 45, 13% of sales respectively.
Positives
What I like about GTLS is that it has done a real good job in steadily reducing its debt both on a yearly and quarterly basis, it has also steadily increased cash, coverting net receivable and inventory into cash without any problem.
It also made strategic acquisitions during economic weakness, for instance, it  has recently acquired Covidien, its major competitor in the field of liquid oxygen system, this should help it solidify its leading position in this area, however note the relative small percentage of that product line related to the overall revenue sources.  (Among these three segments, Biomedical segment has the highest profit margin (36% vs. 30% for D&S and lower 20% for E&C).
GTLS has CROIC rate of 15% in recent years and FCF/sales of 5.7% (average), both of which have improved compared with previous years; 2008 CROIC and FCF/sales number are 24.7% and 10.7% respectively.
It has a nice and steady revenue increase over the last 10 years, without compromising gross profit margin, meaning the company was not sacrificing growth by taking on unprofitable businesses.  Operating income margin has been improving.
It had really impressive FCF growth in recent years
In addition, it has a Diversified customer list and some of the well known names, top 10 customers account for sales to our top ten customers accounted for 48%, 45% and 42% of consolidated sales in 2008, 2007 and 2006.
The most recent quarter (Sept, 2009) is also the first sequential order increase since second quarter 2008. However, just to put things in perspective, its order in 2006, 2007 and 2008 has been 605, 826 and 682 million, whereas in recent quarters, it has slowed down significantly to 90, 71 and 91million for 1Q, 2Q and 3Q 2009.

Negatives

Therefore, investing in GTLS is not without concerns.
Backlog at September 30, 2009 was $189.2 million, down 16% from the June 30, 2009 level of $224.6 million. To compare, backlog of 2008, 2007 and 2006 was $398.8 million, $475.3 million and $319.2 million. Therefore, next quarter earning would probably won’t have much of upside. the weak order  number will be sinking in, hurting top line numbers, which hopefully, maybe offset by sequentially increasing order, but the hard number won’t be pretty.
Its business is cyclical in nature, obviously, most companies are trying to control Capex during the economic downturn, which has been impacting revenue of GTLS. Similarly, certain of its core businesses underperformed in the years prior to 2004 due to a general downturn in capital spending in the global and domestic industrial gas markets.
Another point is that goodwill accounts for a significant portion of total asset value, in the event of continued economic downturn, there might be non-cash impairment charge which will hurt operation income numbers.
It also has about 15million underfunded Pension liability which could further hurts its financial situation.
Valuation
With most recent year’s FCF of 80million, using 10% growth rate and 15% cash discount rate, I am getting a FV of 856 million, which translate into per share price of 30.06 (50% MOS=15)
It has a nine month cumulative EPS of 1.57, with an estimated flat EPS for 4Q due to some expected decreased margins, that brings an annual EPS of 1.6-1.7 (not including 0.15 per share restructuring charge). I believe this is conservative, given 2Q has the weakest order numbers. But using this, that gives a P/E ratio of <10 without the once time restructure charge. The conservative estimate plus potential sequential improvement could help drive the stock price higher. (economic recovery won’t be straight line up, so any correction will of course impact the forecast).

Disclosure, I do not currently own shares of GTLS.

Steinway Musical Instruments Inc. LVB

1. Business Moat: As one of the industry leaders, LVB has strong brand recognization, many of Steinway’s competitiors are failing in the tough economic environment, whileas LVB was able to gain market share.

2. FCF: Steady cash flow over last 10 years (FCF~20mm) except 2008, 2009.  Using a normal year cash flow gives a cash yield of ~20% at today’s market cap;

3. Clean Balance Sheet, steady Revenue yoy. EPS between 1.5-2.0 on a normal year.

4. Valuation:

DCF: using 15% discount rate, 0% growth and a conservation FCF from 2008 at 13.8MM, LVB is valued at $23.32.  At Friday’s close price of $12.00, LVB is 49% valued at its fair price with a comfortable safety margin.

P/E, P/B: Using a normal year EPS of 1.5 (low end of past 10years) and a P/E of 12 (again conservative value of the past year P/E), yield a fair value of $18.  The stock is currently trading at P/B of 0.67, its historical P/B value is between 1.1-1.8. 

5. Risks: a. inventory turnover is much slower compared with previous years, which is understandable given the economic downtown.  b. The company mentioned in its 10K on risk associated with competition with itself – i.e. 2nd hand piano it sold before; c. unionized workers UAW decertification seems to be well underway, reduce the risk of disrupted operation.  d. time it will take the market to recover to normal level

Overall, LVB is a decent stable business which take a hit with the global economic downturn.  Its share price should recover as the economic situation improves.  We are looking at potential 50-100% upside with limited down side risk at today’s price level.

Orbit International Corp. ORBT

http://www.orbitintl.com/

Orbit companies have been relied upon to design and manufacture subsystems and major components for prime contractors, government procurement agencies (both foreign and domestic), and R&D laboratories worldwide since 1957.

 1. Business Moat: The Orbit name is synonymous with ultra-rugged Human-Machine Interface (HMI) devices and software solutions.  Being in operation for over 50 years, that is a lot of saying in itself.

2. FCF: Positve FCF over that lst 5 years with avarage value of 1-2 MM (except 2008).

3. Clean Balance Sheet, paying down debt over the last few years.  Current ratio 5.1.  Steady increased revenue, avearge EPS over the last 10 years ~0.5.

4. Valuation:

DCF: using 15% discount rate, 0% growth and a conservation FCF  of 2.0MM, ORBTis valued at $5.94. 

P/E, P/B: Using a normal year EPS of 0.5 (low end of past 10years) and a P/E of 10 (again conservative value of the past year P/E), yield a fair value of $5.  The stock is currently trading at P/B of 0.82, its historical P/B value is between 0.4-3, mostly between 1-2. 

5. Other positives: recent insider buys, share repurchase, delayed government order realization in revenue, most recent new orders and reoccuring revenue http://finance.yahoo.com/news/Orbit-International-Corp-bw-946798737.html?x=0&.v=1

6. Risks: a. a relatively thinly traded stock,

Overall, ORBT is a pretty safe play at the current price level, with some positive news in the piple and strong insider activity, the stock should realize its target value in relatively short time frame.

Disclaimer: The author holds ORBT and LVB.  This is not a buy or sell recommendation.  Do your own research before investing.