Fabián Ponce/iStock via Getty Images

Fabián Ponce/iStock via Getty Images

The following segment was excerpted from this fund letter.

We initiated a position in Chart Industries, Inc., a leading global manufacturer of highly engineered cryogenic equipment used in liquid gas supply chains supporting industrial gas, natural gas, liquified natural gas (LNG), and emerging clean energy end markets.

Chart’s primary products are heat exchangers and cryogenic storage vessels supported by upfront engineering, service, and repair. CEO Jill Evanko took over a more cyclical fossil-fuel-focused company in mid-2018 and revamped the business by leveraging strong market positioning in key cryogenic technology and deploying strategic capital to create a lean picks and shovels supplier serving not only legacy Industrial gas and LNG customers, but also Specialty Markets such as hydrogen, carbon capture, water treatment, and food & beverage.

This broader end-market focus has led to several first-of-a-kind orders and customer wins, with an impressive 402 new customers added in 2021. Jill also emphasized and expanded a repair, service, and leasing business with long-term contracts that provide stable recurring revenue streams. Chart maintains high market share given its long history (over 100 years!) of operations, depth and breadth of quality product and solutions (87% of products include Chart’s intellectual property), and global operating footprint.

Chart is also one of a few companies that can make brazed-aluminum heat exchangers, a key component in liquefaction processes, and has the two largest brazing furnaces in the world.

At its early 2022 investor day, the company released 2025 targets of greater than 17% revenue CAGR and greater than 25% EPS CAGR from 2022 levels driven principally by LNG and Specialty Markets growth. The world’s limited investment in natural gas and LNG infrastructure over the past decade, exposed by the current Russia-Ukraine conflict, and a growing mentality towards cleaner and greener, both play into Chart’s core capabilities.

Within LNG, Chart is benefiting from strong demand for large-scale export terminals, small/utility scale projects, and infrastructure equipment. Within Specialty Markets, the fastest growing and highest margin segment, global decarbonization and sustainability trends will drive increased hydrogen, carbon capture, and water treatment demand, with segment revenues expected to increase from $433 million in 2021 to upwards of $1 billion over the next several years.

We believe we are buying the stock at a very reasonable multiple of 2023 EBITDA, and that the company can exceed its 2025 targets and continue to grow revenues at a mid- to high single-digit CAGR, and EBITDA at a faster clip through the end of the decade. Given its capital-light manufacturing model, the company will produce meaningful free cash flow (mid-teens % of revenues) to use for strategic M&A and returning capital to shareholders.

We believe Chart can compound cash flow at a mid-teens rate through the end of the decade with a demand profile driven more by customers’ long-term investment decisions and less by near-term macroeconomic factors, making it a great addition to our Industrials holdings and existing portfolio.

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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Additional disclosure: Investors should consider the investment objectives, risks, and charges and expenses of the investment carefully before investing. The prospectus and summary prospectus contain this and other information about the Funds. You may obtain them from the Funds’ distributor, Baron Capital, Inc., by calling 1-800-99BARON or visiting www.BaronFunds.com. Please read them carefully before investing. Risks: The Adviser believes that there is more potential for capital appreciation in smaller companies, but there also may be more risk. Specific risks associated with investing in smaller companies include that the securities may be thinly traded and they may be more difficult to sell during market downturns. Even though the Fund is diversified, it may establish significant positions where the Adviser has the greatest conviction. This could increase volatility of the Fund’s returns. The Fund may not achieve its objectives. Portfolio holdings are subject to change. Current and future portfolio holdings are subject to risk. The discussions of the companies herein are not intended as advice to any person regarding the advisability of investing in any particular security. The views expressed in this report reflect those of the respective portfolio manager only through the end of the period stated in this report. The portfolio manager’s views are not intended as recommendations or investment advice to any person reading this report and are subject to change at any time based on market and other conditions and Baron has no obligation to update them. This report does not constitute an offer to sell or a solicitation of any offer to buy securities of Baron Small Cap Fund by anyone in any jurisdiction where it would be unlawful under the laws of that jurisdiction to make such offer or solicitation. BAMCO, Inc. is an investment adviser registered with the U.S. Securities and Exchange Commission (SEC). Baron Capital, Inc. is a broker-dealer registered with the SEC and member of the Financial Industry Regulatory Authority, Inc. (FINRA). © Baron 2022 All rights reserved