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It’s not a bridge builder from Chicago, but it is an excellent investment opportunity



February 25, 2008 – Comments (5) | RELATED TICKERS: CBI

Company: Chicago Bridge & Iron (CBI)

CAPS starting price: $42.40 (2/14/08)

Market Cap: $4.38 Billion

Along with all of the pain that the market has brought our portfolios lately, it has given us gifts in the form of great companies that have seen their share prices unreasonably hammered.  As I have sifted through the rubble over the past couple of weeks I have been taking a close look at energy companies, adding a few diversified oil and gas companies and drillers along the way.  While looking at them, I came across a related industry that has prospects which are probably just as good, but which has been hit much harder than pure oil and gas plays…energy infrastructure.  Infrastructure companies have been pounded over the past several months as fears of a U.S., and even a global slowdown have grown.  However, what could be safer than a company which caters to an industry that has been churning out record-breaking profits year after year?  Even if the price of oil and gas slides somewhat, most energy companies are still earning big bucks and they have tons of cash to proceed with their projects as planned.  The latest company that I am interested in has a list of clients that are making money hand over fist, including ExxonMobil, ConocoPhillips, Chevron, Shell, BP, Pemex, Saudi Aramco, Sinopec Corp., Lukoil, Valero, CNOOC Limited, and Qatar Petroleum to name a few.

The name of the company is Chicago Bridge & Iron (CBI).  Headquartered in the Netherlands, CBI is a global technology…what’s that, you’re confused by the fact that a company named “Chicago” Bridge & Iron is headquartered in the Netherlands (not to mention the fact that it doesn’t actually make bridges).  I was too, so I looked into it.  The company was founded in Chicago, Illinois in 1889.  As its name indicates, it originally designed and built bridges.  Over the years, its business evolved to focus on bulk liquid storage.  In 1996 the industrial gasses company Praxair purchased CBI for its gasses business.  A year later, Praxair spun-off CBI’s domestic and international operations under one parent company on the New York Stock Exchange.  Its North American headquarters was relocated to Houston, Texas and its corporate headquarters was opened in the Netherlands.

So as I was saying, CBI is a global technology, engineering, procurement, fabrication, and construction company focused on the energy sector.  It designs and builds a wide-range of projects including liquefied natural gas (LNG) facilities, refineries, pipelines, offshore structures, bulk liquid terminals, and water storage / treatment facilities for its clients.  The company also provides maintenance and repair service for chemical plants and refineries.

Chicago Bridge & Iron is a truly a global company.  In 2006, 53% of its revenue came from North America, 35% from Europe / Africa / Middle East, 8% from Asia-Pacific, and 4% from Central / South America.  Today, its revenue is split basically 50 / 50 between North America and the rest of the world, but it is rapidly expanding outside of the U.S.  Only 30% of the projects that the company was awarded in 2007 through Q3 were in the United States or Canada.  In its latest conference call, CBI management forecasted that its work outside of North America will continue to average at least 50% of its new business over the next several years.

CBI has been firing on all cylinders lately.  In its most recent quarter (Q3 ’07) its revenue grew 36% to $1.2 billion.  This marks an astounding seventh consecutive quarter of 30%+ revenue growth.  Year-to-date in 2007, its revenue is up 35% to $3.0 billion.  CBI’s Q3 earnings per share came in at $0.61, an increase of nearly 85% from the $0.33 that it reported during the same period in 2006.  At the end of the third quarter, CBI raised its earnings guidance for the year to $1.60 to $1.75. 

Not only have its earnings been growing at an outstanding rate, but CBI’s backlog of business has been growing as well.  As of the end of Q3 it stands at $6.4 billion, up 40% from the beginning of the year.  Furthermore, CBI keeps its expenses fairly low, which provides it with incredible operating leverage that enables it to actually improve its margins as it generates more business.  While its revenue experienced a large 36% increase during the third quarter, its SG&A expenses of only rose 4%.  In Q3 2007, its margins were 3 basis points better than they were in Q3 2006.

As mentioned above, CBI’s results for the third quarter outstanding, but they were actually held back by one problematic LNG project in the UK, which is winding down (it was 80% complete as of the Q3 conference call).  The project experienced cost overruns as a result of lower than expected labor productivity.  This appears to be an isolated incident.  If so, and if CBI has learned from its mistakes (which I believe is the case), CBI’s numbers in future quarters will be even better once the project is behind it.  We will need to keep an eye on the Company’s execution on future European projects.

Not only will the completion of the problematic LNG project help CBI’s earnings, but in November it acquired Lummus Global for $850 million.  This acquisition is expected to be accretive to earnings in 2008.

One would think that the stock of a company that is growing so quickly would be performing well, right?  Wrong.  Since the beginning of the year (January 3rd to be exact) its stock has dropped 30%.  Chicago Bridge & Iron is a company that has been performing great, which serves a rapidly growing industry, generates tremendous amount of cash that it uses to buy back shares (during the first nine months of 2008 CBI repurchased 976,000 shares) and make solid acquisitions (most recently Lummis), yet is available at a much cheaper price today than it was only a few short months ago despite the fact that nothing has changed.  I believe this is a winning combination.


Long CBI

5 Comments – Post Your Own

#1) On February 25, 2008 at 6:06 AM, DemonDoug (30.95) wrote:

Deej, great find.

I will say, for myself, for companies like this, I want to wait until they are absolute screaming buys.  p/e of 27 is too high for my blood, and also we're seeing municipalities having failed bond auctions - I wouldn't be surprised if there is a miss to earnings in this quarter and next quarter while these things play out.  Overall I would say CBI looks fairly valued - definite upside, but definite downside too.  The paltry dividend doesn't inspire increased confidence either.

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#2) On February 25, 2008 at 7:27 AM, TMFDeej (98.34) wrote:

Thanks Doug.  You're right, as more of a value guy than a growth guy at heart its P/E of is definitely a little rich for my blood as well, but CBI has been growing at an amazing rate.  I personally established a position already because I think that they are going to knock the cover off the ball this quarter and I didn't want to miss the boat.  I don't believe that the problems that municipalities are having raising money will have an impact upon CBI because unlike a lot of other infrastructure companies, it almost exclusively serves energy companies not the government.  You're right that the dividend is tiny, but it is growing ;).  CBI is using its money mainly to fuel growth and make substantial acquisitions.


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#3) On February 25, 2008 at 9:22 AM, GS751 (26.91) wrote:

Deej and George soro's are sniffing around CBI.  Why shouldn't I?

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#4) On February 25, 2008 at 9:23 AM, Capsperson wrote:

Great info.  Thanks for sharing it.

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#5) On March 28, 2008 at 11:15 AM, TMFDeej (98.34) wrote:

Here's an update: 

CB&I Upgraded by Goldman Sachs 

While I normally take what analysts say with a large grain of salt, Goldman Sachs is usually pretty good.  So I'm happy to say that Goldman added a company that I have been very high on, Chicago Bridge & Iron (CBI), to its "Conviction Buy" list this morning.  Goldman raised its earnings estimates for 2008 and 2009 for the company and it stated that it believes that most other analysts' estimates are too low.  Goldman also stated, as I had discovered earlier, that CBI is the most highly leveraged infrastructure play to the energy industry and that we are in the middle of a "long-run energy investment cycle."  Not only that, but CBI's shares are trading at the lowest multiple of the energy-focused infrastructure group that Goldman follows.  Goldman sees a whopping 50%+ upside to CBI's stock from today's price.

Long CBI

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