Chicago Bridge & Iron Continues to Reward Investors

 |  About: Chicago Bridge & Iron Company (CBI)
by: George Fisher
Chicago Bridge and Iron (NYSE:CBI) - $42 continues to execute in a robust market. Founded in 1898 and in its 113th year, CBI does not build bridges or is it a fixture in Chicago. CBI is an energy infrastructure engineering and construction (E&C) firm with headquarters in the Netherlands and the majority of its business in places other than North America. In 2010, 75% of new business was outside the USA.
CBI announced 2nd qtr and first half results and the company continues to excel in earnings, new awards, and backlog.
Revenue is up to $1.09 bil and earnings are up to $0.62 for the quarter, and $2.05 bil and $1.19 for the first 6 months, respectively. Since Jan, the company generated year-over-year (y-o-y) EPS growth of 20%.
However, as with all E&Cs, reviewing new awards and, more importantly, backlog is more informative concerning the business climate going forward. CBI is generating a nice book of business with near-record backlogs. At the end of the quarter, the backlog of business stood at $7.3 bil and rivals 2007 and 2009 levels.
Order intake for the first 6 months increased to $2.2 bil and represents a 57% y-o-y jump. Order intake was up 32% for the quarter. At anticipated revenue of $4.3 to $4.7 bil for 2011, the current backlog represents 18 to 20 months of future business.
CBI recently was awarded two substantial orders. From the quarterly earnings press release:

“Last week, CB&I announced a $2.3 billion contract for the mechanical, electrical and instrumentation work on the Gorgon LNG project in Western Australia, and today, the company announced a $500 million contract for two LNG storage tanks on another Australian LNG project. These awards are not reflected in second quarter results and will be included in the third quarter earnings report. “

The Gorgon project is a joint venture with England-based Kentz and CBI is expected to contribute about 65% of the contract. The project is expected to be completed in 2015. 2011 new awards just grew to $4.2 bil, or about the equivalent of 12 months revenue booked in the first seven months of the year. Total new awards for 2011 are expected to be in the $6.8 to $7.2 bil range, a substantial increase from previous management estimates in Jan of $5.0 bil to $5.5 bil, with annual revenue of $4.3 to $4.7 bil.
CBI forte is building energy related infrastructure in the global market. LNG export and import terminals are getting bigger and more costly, such as the Gorgon project. This favors CBI as it is a substantial part of its focus. CBI offers design services, called Front End Engineering and Development (FEED), allowing the firm to participate in the initial stages of many of these multi-year energy projects. Previous FEED projects are now helpful in driving higher amounts of new awards. As an example, CBI was awarded a $500 mil contract in 2009 for FEED and construction work at the Gorgon project.
CBI is a major global bulk storage facilities E&C firm for petroleum, natural gas and liquids, and this sector represents about 40% of total revenue. The company has built 46,000 steel structures worldwide. Production expansion in the Oil Sands has allowed CBI to capture several new storage projects in Canada. The company also has capabilities to design and construct new oil refineries, such as its project in Peru.
Management has created a conservative, well managed company that is underappreciated in the field. The balance sheet is strong and recent profitability has been noteworthy, exceeding competitor’s performance. CBI has the highest operating margins of the E&C industry at 8% to 9%, with industry peers ranging from 3% to 6%. Return on equity is running 21%.
Earnings per share are expected in the $2.40 to $2.45 range for 2011, and around $2.85 in 2012. At its current price of $42.50, valuations are 17 PE for this year and 15 PE looking out to 2012 earnings estimates. This is about average for E&Cs during mid-cycle valuations, with a range of 16 PE to 19 PE. During late-cycle valuations, PE ratios usually expand to the 18 to 22 range. At a 17% growth rate for 2013, EPS could reach $3.30. At mid-cycle valuations, share prices could be in the $52 range and at late-cycle valuation, share prices could reach $65.
While the stock has been very strong recently, its run is not over. However, the time it will take to move the stock 30% higher from here will be longer than the most recent 30% climb. Although CBI pays a token dividend, the company has been recently buying back a few shares. CBI should provide annual total stock returns of 17% to 20+% annually going out the next few years.
Energy investors should review CBI as an interesting offset to the traditional Exploration and Production Company. While its business is driven by the capital expenditure budgets of large multi-national and state-owned oil companies, its fortunes are based on a growth in demand for oil and natural gas, and not necessarily directly tied to its price.
A five-year chart is below - (click to enlarge):
Click to enlarge
Disclosure: I am long CBI.

Disclaimer: As always, investors should conduct their own due diligence, should develop their own understanding of these potential opportunities, and should determine how it may fit their current financial situation.