Use access key #2 to skip to page content.

My e-mail to Jim Jubak

Recs

8

August 19, 2008 – Comments (3) | RELATED TICKERS: CBI , JEC

vs.

 

This morning I came across a disturbing article by Jim Jubak titled "The key to our wild market: Asia."  Why do I find the piece disturbing you ask?  It's not for the reason that you think. I have always reeeally liked Jubak. I read his columns regularly, but what he is saying here makes absolutely no sense. I am very surprised that he would make an error like this. I guess that's why one should never take anything that they read at face value without running it through their own filters first. Let me explain.

At the end of the piece he talks about a company that I own and closely follow, Chicago Bridge and Iron (CBI).  Specifically he states:

"There are two exceptions to my generally positive take on events and price movements in the commodity sector. First, the cancellation of so many infrastructure projects in Asia will hit big engineering companies such as Chicago Bridge & Iron and Jacobs Engineering hard. The sector is likely to see some of its big backlog of work evaporate or get stretched out."

Yet just before this statement about CBI he says:

"That means the next wave of inflation will begin from a higher base rate. A move back toward growth in Asia at this time almost guarantees that global inflation will accelerate to dangerous levels in the next few years. In that environment, you want to own commodity stocks and other inflation hedges."

This implies that we will see significantly higher prices for oil and natural gas in the future, which I agree with.  High prices for these commodities would steer tons of new business towards Chicago Bridge and Iron. Oil and LNG projects are right in its wheelhouse.

Jubak implies that infrastructure spending will slow down in places like China. If that does happen, and I do not necessarily believe that it will, but for the sake of this discussion we will assume that Jubak is right. A slowdown in Chinese spending on infrastructure would have very little impact upon CBI. In 2007, only 11% of CBI's revenue and 10% of its new contracts came from Asia. I doubt that even half of this Asian business came from China, but for the sake of this argument we'll call the company's China business 5% of its revenue and backlog.

This compares with the 55% of the company's revenue that came from liquefied natural gas projects and 22% that came from oil projects (77% total).

Which do you think will have a bigger impact upon CBI's future results, a slowdown in 5% of its business or a boom in 77% of its business? I rest my case.

Perhaps Jacobs Engineering (JEC) would get hit much harder by a slowdown in spending on infrastructure in China, I am not nearly as familiar with that company's business, but I don't think that it would be nearly the problem that Jubak implies for CBI.

This morning I sent the following e-mail to Jim.  I doubt that he will reply, but we'll see.  If he does, I'll share his response.

"Good morning, Jim. Thank you for taking the time to read my e-mail. Let be begin by saying that I am a huge fan of yours and that I love and regularly read your columns. Having said this, I was very surprised by your commentary on Chicago Bridge and Iron (CBI) in your recent column titled “The key to our wild market: Asia” (from 8/19). On one hand you say:

"That means the next wave of inflation will begin from a higher base rate. A move back toward growth in Asia at this time almost guarantees that global inflation will accelerate to dangerous levels in the next few years. In that environment, you want to own commodity stocks and other inflation hedges."

This implies that we will see significantly higher prices for oil and natural gas. High prices for these commodities would steer tons of new business towards Chicago Bridge and Iron. Oil and LNG projects are right in its wheelhouse.

You also say that infrastructure spending will slow down in places like China. If that does happen, and I do not necessarily believe that it will, but for the sake of this discussion we will assume that you are right. A slowdown in Chinese spending on infrastructure would have very little impact upon CBI. In 2007, only 11% of CBI's revenue and 10% of its new contracts came from Asia. I doubt that even half of this Asian business came from China, but for the sake of this argument we'll call the company's China business 5% of its revenue and backlog.

This compares with the 55% of the company's revenue that came from liquefied natural gas projects and 22% that came from oil projects (77% total).

Which do you think will have a bigger impact upon CBI's future results, a slowdown in 5% of its business or a boom in 77% of its business?

Perhaps Jacobs Engineering would get hit much harder by a slowdown in spending on infrastructure in China, I am not nearly as familiar with that company's business, but I don't think that it would be nearly the problem that you imply for CBI. CBI has experienced its own problems recently with completing projects on time and on budget lately (specifically one major U.K. LNG project), but I strongly believe that if the company executes well that it will be an excellent investment going forward.

Thanks again for taking the time to read my response."

Deej

Long CBI 

3 Comments – Post Your Own

#1) On August 19, 2008 at 9:33 AM, synergize (30.20) wrote:

We see/view the world based on our own filters. What he said is legit and what you said is also legit. Nobody made an "error like this" unless the error is a typo error.

Sharing our thoughts and ideas is always a nice thing.  

 

 

 

Report this comment
#2) On August 19, 2008 at 10:08 AM, TMFDeej (99.31) wrote:

This has nothing to do with filters.  His error was stating that a slowdown in China would have a big impact upon Chicago Bridge & Iron's earnings when the company in fact conducts very little business there...while at the same time saying that the price of oil and gas will go up, which would be beneficial to the company.

Deej

Report this comment
#3) On August 19, 2008 at 1:11 PM, Tastylunch (29.34) wrote:

Let us know if Jubak responds Deej if you feel it's appropriate, I'd be really interested to see what he says. I'm a big fan of his too.

But you're right it does look like he made an uncharacteristic error here. Nice catch.

Report this comment

Featured Broker Partners


Advertisement