Why Chicago Bridge & Iron Is Cheap

I can’t feel bad about buying CBI at these prices (6.79 as I write this).

Overview

Chicago Bridge and Iron (CBI) is an engineering, procurement and construction (EPC) company with a global presence. The company has about 17 k employees and essentially services customers in the hydrocarbon, power, water, and mining sectors. I know what you are thinking – construction? global? And you want to buy this thing! But before you throw this EPC into the trash, take a look at the numbers.

The Numbers

When there is a global financial crisis (like now) I want to be in stocks that are not going to have to open up new lines of credit or do any type of debt financing. That is why I like CBI. The company has continually reduced its LTD-cap, from 35% in 2000, to 17% in March of 2008 to 5% today. Moreover, the company has got 242 million in cash (the market cap is only 647 million dollars at current prices). Furthermore, and most importantly, CBI has 1.4 billion dollars in unused bank lines. (see slide below from Q3 corporate report)

Also enticing me to buy CBI is the company’s impressive backlog - $6.2 billion of backlog with 704 million dollars of new backlog last quarter (see below). In addition to that, CBI is well positioned to take advantage of a move toward liquefied natural gas, wind power and nuclear energy.

Conclusion

CBI is really cheap right now – but it may stay that way for a while. I think this is a bargain name for anyone looking to invest, but not necessarily a great play for someone looking for a quick trade. The firm has caught some bad luck with its UK operations and will most likely not be profitable this year. But revenue is growing, and the company has tons of money it can call upon in the forms of letters of credit. In short, CBI is a really cheap way to play the future energy infrastructure market.

Disclosures – plan to be long CBI soon.

Comments

[je:]

I also like CBI but just like everyone else - we are waiting for the hedge funds to be flushed out ........

2008 Nov 25 10:24 AM

[DGBruno:]

You indicated that you like companies that, in a crisis, don't have to open new lines of credit or get debt financing. Given the industry that CBI is in, aren't all of their customers wed to the debt markets to finance their projects? Large infrastructure companies are only cutting back on capital spending expectations. All people talk about these days is the deleveraging of businesses and consumers - I think that will negatively affect CBI in the near term and possibly over the longer term, regardless of their balance sheet strength. Their balance sheet strength and access to credit may allow them to weather the storm, but I doubt it means they are undervalued. Much like with the airplane manufacturers, you will see that backlog start to disappear. Lastly, their margins are looking very thin relative to last year. Don't underestimate the market's ability to accurately price assets.

2008 Nov 25 12:29 PM

[Sage of Sug...:]

You are probably right. CBI could see a nice bounce back over the next couple of years. But fundamentally I have concerns. Management has made a slate of acquisitions/mergers--... Howe-Baker, John Brown (UK), and most recently ABB Lummus. It is not easy in this industry to amalgamate the different "cultures" these newcomers bring, and the company is far from firing on all cylinders.

Add to this management short sight in trying to gain market share in the LNG Terminal business at the cost of margins--in fact, as we have seen, both UK projects have accumulated huge losses--both in money and in reputation, due to the large delays.

The balance sheet is anything but pristine. The Sep 08 report shows short term liabilities exceeding short term assets by over $850 million--larger than the company's current market cap.

There is probably money to be made--but this company is not for the cautious investor.

2008 Nov 25 07:41 PM

[Dobby:]

I believe they've missed analyst's estimates the last 3 Qtrs. It might be oversold, but I'd wait until they get their act together first. Better buys would be ABB, FWLT, FLR or FLS.

2008 Nov 26 12:51 PM