Sizing Up Infrastructure Stocks: Which Provides the Best Industry Exposure?

For any of you who watch Mad Money - a habit I seem to have picked up in the last week - you will know that Jim Cramer has been quite high on so-called “infrastructure” stocks like Chicago Bridge and Iron (CBI), Fluor (FLR), Foster Wheeler (FWLT), and McDermott (MDR). These companies all are responsible for the heavy construction projects that are required to harvest and process natural resources, and have seen exceptional demand, particularly from emerging markets in Asia and the Middle East. Having followed CBI for nearly two years, I can remember when it was racked with an insider scandal and fell to the low $20s, where it seemed like a great buy. Now at $39, I have to wonder whether or not CBI is pushing the upper limits of fair valuation, and whether it would be better to get exposure to this industry through FLR, FWLT, or MDR… or the stock that I think has been really overlooked here - Global Industries (GLBL).

To determine the relative power rankings of these five stocks, I scaled the same methodology I use to generate my quantitative rankings and then did a quick and simple cash flow valuation. The results…

1. Global Industries. A selection on the current top 25 stocks list, Global is the most concentrated play in the group as the company focuses almost exclusively on offshore oil and natural gas construction. GLBL trades for just 6x EV/EBITDA and 12x EV/Free Cash Flow, and with returns on capital in excess of 30%, I believe this is the best play in the industry. Like most companies, shares are near a 52-week high at $22, but I value shares of GLBL at over $30, or more than 35% upside from the most recent close.

2. Chicago Bridge and Iron is the more diversified play in the industrial construction area, with experience in power, water, and chemical infrastructure in addition to the oil-and-gas complex. CBI has done an excellent job managing working capital and leveraging its global expertise to drive excellent returns on capital as well as generating large amounts of free cash flow. It trades at relatively low valuation multiples at 12.3x EBITDA, but has a wide gap over its competitors on ROIC metrics. I think CBI shares could realistically see $50, meaning there still might be more than 20% upside from the most recent close.

3. FLR doesn’t have the same attractive valuation that GLBL or CBI does, but at 15.5x EBITDA and for 24x FCF, the company is a solid also-ran in this contest. Although a solid all-around play, I see FLR shares as being fairly valued here with slight upside - target is $110.

4. McDermott is similar to FLR in many respects and appears cheaper at 13.8x EBITDA, but I think the shares have overextended beyond fair value. MDR has some of the better returns on capital in the group, but its lack of any sizable free cash flow is a negative.

5. Foster Wheeler, at 19x EBITDA and 22x Operating Cash Flow and with the lowest returns on capital of the group, comes in last. With several superior players, I see no reason to own FWLT at current price levels above $75, when I believe fair value is closer to $65. Since the shares offer no margin of safety, I’ll be staying away from this one.

I think the two best stocks to play the infrastructure buildout are GLBL for those looking for a pure play on energy, or CBI for those looking for a more diversified company. Unlike the other competitors, both companies are efficient and profitable, and generate plenty of cash to supplement their already-strong balance sheets. With the valuation and quantitative metrics in-line here, I see significant further gains to be had in these two stocks.

Comments

[bnnmoon:]

great article. thank you for the insights.

2007 May 12 12:37 PM

[Pete C.:]

great article, those charts are quite revealing. your insight is spot on. thanks, pete.

Jan 29 02:01 PM

[EYoung:]

Article written 5/11/07, I just read it on 4/09/09,,, the information is STILL totally relevant and useful, even if only as a take off point for further exploration~!,,, Thanks, Seeking Alpha,,, I admire your daily mailings, as well,
EY 4/9/9

Apr 09 08:21 PM