Use access key #2 to skip to page content.

Are they lying or just inept? / A company that's selling for peanuts / It's a beautiful day in the neighborhood / Where is oil headed?

Recs

18

August 03, 2008 – Comments (10) | RELATED TICKERS: CBI , FDP

It’s a beautiful day here on the New York City area. I just spent four hours at the pool and I am now sitting on my deck working on my laptop. Days like today are nice enough to make me forget about how frustrating the stock market has been lately. Those of you who have been following my blog know that I have actually been fairly accurate with my sector and specific company calls. I’m definitely batting over .500 and probably closer to .750…yet my portfolio returns are still flat to slightly negative over the past year, mainly as a result of multiple contraction. I would be in much worse shape if I didn’t hit a home run with a 30% gain on the ten or so stocks that I shorted for a few weeks ago when the market really hit a rough patch.

As you can tell from my CAPS score, I have been significantly outperforming the -20% return of the S&P 500 over the past year, but flat to negative over an entire year still stinks, especially when one puts as much time into this as I do. I could easily get discouraged by all of this and say screw it, I’m going get drunk and waste my money on random junk like most Americans do, but that’s not my nature.

Instead of getting sad, I get mad and say “Damn it, I’m better than this!” I plan on working even harder over the next year to make sure that my portfolio performs even better. That means reading more, spending less, and saving more. I have been getting some amazing deals on stocks over the past six months. Even my beloved energy stocks, are on sale in many instances right now.

One such stock has been hit by a double whammy lately, multiple contraction in the infrastructure sector combined with poor operational performance. The company that I am talking about is Chicago Bridge and Iron (CBI). I did my original full write-up on CBI back on February 25th (see post: It’s not a bridge builder from Chicago, but it is an excellent investment opportunity) after it fell significantly, along with the rest of the infrastructure sector at the beginning of the year. At that time it was trading at $45. Today its stock sits at $32.

Part of the drop was sector related, but a large portion of it comes from huge charges that CBI had to take as a result of cost overruns at a Liquefied Natural Gas plant in the U.K.  I was fully aware of the issues that with this project when I wrote-up CBI, but I thought that with the project almost complete they would not be a big deal.  I was wrong and I fully admit that.  So, is this a messed up company that will continue to fall, or an investment opportunity? After doing some research and thinking about it for a little while, on July 19th I wrote that I believe this is an excellent buying opportunity (see post: Should you buy a collapsed bridge?).

An article in this week’s Barron’s agrees with me. The piece titled “Metal Bender With a Modern Mission” states that CBI could rally to $40/share with in a year and more than double to $75 in five years. This company is involved a number of sectors that I personally find very attractive like natural gas, nuclear, chemical plants, refineries, water and oil storage tanks, etc… and it has been performing relatively well, winning tons of contracts and completing them on time and on budget…except for those darn U.K. LNG plants.

The company’s CEO recently said “If you took away these U.K. projects, our backlog and outlook would suggest earnings per share in excess of three bucks” instead of the $0.60 that it now expects to report. I know that this is like me saying “If you took away my flabby abs I would be an underwear model.” But the LNG projects are mercifully nearing completion. If the company can restore investor confidence in it by executing well from here on, we’re looking at a home run investment.

 

---------------------------------------------------------------------------------

This week’s Barron’s also had an interesting blurb on Fresh Del Monte Produce (FDP). Del Monte has dropped from a high of 40 back in July all the way to the 22 level that it closed at on Friday on concerns about a recent acquisition, low profit margins, and general market weakness. This is another one of those CHEAP stocks that are floating around out there right now. Del Monte is selling for peanuts (I know it’s bad, but I couldn’t think of any fruit analogies :) ).

The company has a solid brand name, management that has delivered industry-leading returns, and it trades at only 10 times its estimated earnings for this year. The most attractive stat about this stock is that it trades for right around book value. We’re not talking one of those hocus pocus fictional book values that so many companies out there report either. Del Monte has real assets on its books at reasonable valuations, like farmland reported at cost, ships, etc…

 

---------------------------------------------------------------------------------

After a several week hiatus, one of my favorite writers, Barron’s Alan Abelson is back with an excellent column this week. I found two sections of his article particularly interesting this week. The first is his usual bashing of the government’s employment statistics. One can always count on Abelson to tell it like it is on the employment front.

Over the past year, the Bureau of Labor Statistics has reported that the U.S. economy has lost 535,000 jobs. That in itself is disturbing, but wait until you read this. The BLS’ absurd birth / death adjustment that I have mocked numerous times in the past added an astounding 853,000 pretend jobs to the official total. Without this fictional adjustment, the straight job loss was three times larger, a whopping 1,388,000!  One has to wonder if the BLS is lying to everyone or just inept.  Neither one is acceptible, but I would prefer the former to the latter.

Furthermore, a better way to look at the current jobs situation would be to look at “labor underutilization.” That number includes those who are officially unemployed plus those who have been forced to work part-time because they cannot find full-time employment and those who want to work but have given up trying to find a job. The labor underutilization rate currently sits at a massive 10.3%. This is the highest recorded level since September 2003 when the U.S. was still recovering from the bursting of the dot-com bubble and 9/11. If one looks further back than that, this is the highest level since October 1994.

 

---------------------------------------------------------------------------------

The other interesting part of Ableson’s article was his discussion on where the price of oil is headed. He cited a recent report by Barclays Capital Research, which he believes is one of the best research departments in terms of looking at commodities. This report called oil’s run to nearly $150/barrel a “short-run overshooting of prices,” but stated that it’s retreat has been orderly and hardly “a bubble burst.” The report goes on to state “The demand side of the market does not seem to be quite as soft at the global level in reality as it currently is in market sentiment.” Barclays sees oil swinging from $115 to $140 for the rest of the third quarter, with an average price of $128.

While I am quite heavy on oil stocks in my personal portfolio, I tend to be conservative in that I have not been buying companies that only have exposure to oil sands or shale. Similarly I have not been purchasing companies that have tons of debt. I prefer traditional E&P companies with relatively conservative management that use their tremendous cash flow to pay down their debt quickly.  If that means that I give up a little upside for safety, so be it. At anything over $100, these companies are going to be printing money. It is only a matter of time before Mr. Market gives them the respect that they deserve.

Deej

Long CBI

10 Comments – Post Your Own

#1) On August 03, 2008 at 6:19 PM, rd80 (98.28) wrote:

I've seen CBI pop up in at least three different places over the past week:  Barron's, David Lee Smith's TMF piece on the 31st and it was the question of the week stock over at InvestorPlaceBlogs.  I wrote one of the responses for IPB and was skeptical that the problem projects are behind them.  I think that Foster Wheeler is worth the premium in multiple over CBI if you're bullish on energy infrastructure construction.

The Barron's article did mention that CBI still has a lot of fixed price work, but didn't comment on whether or not there might be other problem children on the horizon.

If the cost over run problems are behind CBI, you should pick up a quick 15% or so catching up to their peers.

Time to fire up the coals and break out a T-bone.

Fool On!

Report this comment
#2) On August 03, 2008 at 6:32 PM, DemonDoug (67.62) wrote:

And now for my responses:

I've been tracking CBI since your call in February.  I thought it was a little expensive then, even if that LNG thing had come through.  I think CBI has some other issues beyond that, although long-term they are positioned well as you mention.  I believe it's p/e at that time was in the high 20's/low 30's.  I'm not entirely confident about that 3/share projection, although I do find it reasonable that they will hit 1.50-2 eps for FY 2009.   At 1.50 eps let's just say forward looking, that gives you a p/e of around 20.  I find this too high, yes they are a growth company, but I want a p/e below 15.  I'm not confident they'll get 2.00 eps for FY 2009.

Why?

Due to the general slowdown in the worldwide economy.  CBI could be particularly impacted by an overall slowdown.  I don't see CBI at 75/share; and the puny dividend (16 cents?) is not enough to mitigate further economic slowdown.  I think there is a real danger of CBI dropping into the mid to low 20's, especially if there is a broad market selloff.

My personal opinion is that CBI is about fairly valued right now.  I would not look to add or start a position unless it gets below 25/share, and even then, my stingyness would probably wait until it got under 20/share (if it got there).  In short, I still think it's too early, both for CBI and the overall market.

I also have similar misgivings about FDP.  Their earnings and stock price can literally depend on how good the weather is that day.  They are a stable company with relatively stable earnings - just not seeing where their growth is going to come from.

As far as the bls, they are both dishonest and inept.  The birth/death facade comes from mathematical formulas, and apparently those formulas haven't been changed much.  So in reality, the formulas are inept, the lack of the BLS changing their models is where the dishonesty comes in.

We could also talking about being inept and dishonest by looking at the Fed.  Bernanke is an obvious liar, as is Paulson, everyone knows that.  Where they are inept is that they think that devaluing the dollar is the right way to prevent an economic depression.  This is how you can be both inept and dishonest (by doing things to solve a problem that is not there, and then of course lying about it).

Finally, as always, I agree with your analysis on oil.  I don't see oil shale as "risky" though - ECA, CNQ, and SU are also printing money along with everyone else.  We'll see oil at 150 again, not too far in the future.

Report this comment
#3) On August 03, 2008 at 7:48 PM, TMFDeej (99.33) wrote:

Thanks for the comments, Doug.  We're both oil bulls, I'm just a little more conservative ;).  I like sands and shale as embedded call options in conventional companies.  Exposure to those areas is great, I just personally don't want to buy a company that only has exposure to them.

I would never buy Del Monte in real life, but I'm looking to add it in CAPS.  I think that it's really, really cheap.

I have doubled down on CBI.  Time will tell if it was the right move.  I don't think that the economy will have much of an impact upon it, if any.  As long as energy stays expensive, CBI will get tons of jobs.  It's backlog is AMAZING.

The only question is if the U.K LNG problems are an isolated incident of if they are indicative of terrible management that will continue to mess up.  I'm betting on the former rather than the latter.  Also, CBI has been much more conservative in its bidding lately.  Chicago Bridge is by far the cheapest way to play the energy infrastructure boom.

Deej

Report this comment
#4) On August 03, 2008 at 7:51 PM, TMFDeej (99.33) wrote:

You're making me jealous, RD80.  I had chicken on the grill, not a T-Bone :).  In the infrastructore sector, in addition to CBI I also own FLR & MDR.  I've had my eye on FWLT and own it in CAPS, but I have never pulled the trigger on it in real life for some reason.

Deej

Report this comment
#5) On August 03, 2008 at 8:19 PM, StockSpreadsheet (71.61) wrote:

I think the BLS is both lying and inept.  To me, the unemployment rate would be very easy to figure.  Take the number of people currently working, (which should be easy to get from the tax rolls), divided by the total number of people between 18 and 65 and that is the employment rate.  Subtract that rate from 100 and you get the unemployment rate.  No financial games, birth/death models or any other statistical lying methods.

If you don't like that number, due to the fact that there are soem people who choose not to work, (stay-home moms, etc.), or can't work, (insane, disabled, in prison, etc.), you could take the total population that has worked at the lowest point of unemployment and figure out what that ratio is with total population between 18 and 65.  That could be your baseline percentage, (say it is 80%, just for calculating purposes).  Then your unemployment rate would be figured based on the idea that 80% of the people 18 to 65 want to work and figure what portion of those people who are not working, (which again should be easy to glean from the tax rolls).  That would be your unemployment rate.  If you ever got an employment rate greater than 80% of the people 18 to 65 then that would be your new baseline number off of which all future calculations would be based.  This would allow the number to self-adjust as necessary.

The number of people between 18 and 65 at any one time could easily be estimated from the census figures and from immigration figures.  The total population between 18 and 65 could be calculated for any one year by advancing the ages of the people in the census each year past the census date, adding in the people who would now reach 18 and subtracting the people that would now reach 65.  I don't think that we have too many plagues or mass extinctions as a norm in the U.S., so I don't think you have to worry too much about massive die-offs skewing the numbers, (undercounting those dying between census years).   

I also realize that either of these methods could undercount the true number of employed as neither of them would probably adequately count the number of working illegal aliens in the country.  That is a limitation I am willing to live with to avoid the BLS cooking the numbers, (and I would not want them "estimating" the number of employed illegal aliens to add to the "working population" as I want factual numbers and not their imaginary statistics).  Of course, if we adopt either of my methods, then probably 75% of the people working for the BLS would no longer be needed, so that would bump up the unemployment rate, (if we actually fired those people, which the government hates to do as it reduces their empire-building pool and reduces the justification for employment for a lot of managers who are cronies of the politicians).  Smaller government is a good think, and less expensive government is even better, especially in these days of huge buget deficits.

I think also if they use my method, people would feel less like their government is lying to them, (which they are), and might help restore some faith in government statistics, (at least the ones from the BLS using my method, the official inflation rate would still be a joke).   

Just my two cents.

Craig 

Report this comment
#6) On August 03, 2008 at 11:13 PM, WillSurfForFood (76.55) wrote:

I know you don't like canadian oil sands companies as much as traditional oil and gas but I wanted to share a few headlines from my favorite one Canadian Oil Sands Trust:

Pretty cool eh: 

January 30, 2008

Canadian Oil Sands Trust raises its quarterly distribution 36 per cent to $0.75 per Trust unit

April 28, 2008

Canadian Oil Sands Trust announces 2008 first quarter results and a quarterly distribution increase to $1.00 per Trust unit

July 29, 2008

Canadian Oil Sands Trust raises quarterly distribution to $1.25 per Trust unit

 

Report this comment
#7) On August 03, 2008 at 11:43 PM, WillSurfForFood (76.55) wrote:

I know you don't like canadian oil sands companies as much as traditional oil and gas but I wanted to share a few headlines from my favorite one Canadian Oil Sands Trust:

Pretty cool eh: 

January 30, 2008

Canadian Oil Sands Trust raises its quarterly distribution 36 per cent to $0.75 per Trust unit

April 28, 2008

Canadian Oil Sands Trust announces 2008 first quarter results and a quarterly distribution increase to $1.00 per Trust unit

July 29, 2008

Canadian Oil Sands Trust raises quarterly distribution to $1.25 per Trust unit

 

Report this comment
#8) On August 04, 2008 at 6:18 AM, TMFDeej (99.33) wrote:

I saw that recently, Will Surf.  I have to admit that I was VERY impressed that Oil Sands Trust was able to increase its distribution so significantly.  Thanks for sharing the links.  Do you happen to know what its payout ratio is? 

Deej 

Report this comment
#9) On August 04, 2008 at 1:20 PM, WillSurfForFood (76.55) wrote:

Here is there last earnings report, I know how much you enjoy this type of reading

http://www.cos-trust.com/files/investor/pdf/2008/Q2_2008_Financial_Report.pdf

For the last quarter their net income was 1.04 and the payout was 1.00 . This is a higher payout ratio than they have had in the past, but I think they plan to pay out as much as possible  until 2011 when the tax laws change. Lots of interesting stuff in the report like how much they made per barrel last quarter ($56). 

It looks like they are basing their dividend increase to $1.25 on the assumption of West Texas Intermediate selling around $120 a barrel. The price of oil has come down a bit lately but I think WTI is still north of $120. The price of natural gas has come down quite a bit so their expenses should also be lower. 

I'm guessing once the tax laws change for trusts at the start of 2011 they will become a regulary corporation so they won't pay out as much but they should still be a good investment in my opinion.

 

Report this comment
#10) On August 04, 2008 at 2:54 PM, DemonDoug (67.62) wrote:

I really need to start buying some equities on the TSX.

BTW at less than 10% yield, that is a bit low for a royalty trust. 

PWE, PGH both well over 13% yield.

Report this comment

Featured Broker Partners


Advertisement