Chicago Bridge and Iron Earnings Mixed, but Buffered by Global Exposure

Chicago Bridge & Iron (CBI), another in our infrastructure basket, had a mixed earnings report. They beat revenue quite soundly but missed earnings estimates. However, it had some nice guidance for 2008. The stock has been acting a bit poorly on fears of exposure to a certain debt laden, currency devalued, crony government, financial innovating country, but only about 1/3rd of business is from that backwater. Plus from what I am told, that country will be BOOMING in 6 months ("Fed Cuts Solve Everything") so I don't understand the concern. Ironically, this quarter was hurt by underperformance in the European, African, and Middle Eastern division, not the US. But again, these infrastructure companies have very lumpy quarters so it is hard to judge them on Wall Street's obsession with 90 day time frames.

• Engineering and construction services company Chicago Bridge & Iron Co. NV said Wednesday its fourth-quarter profit rose 15 percent on new contract awards and earnings from a recently acquired business, but the profit missed Wall Street's expectations.
• The company earned $44.2 million, or 46 cents per share, compared with $38.6 million, or 40 cents per share, in the year-ago quarter.
• Revenue surged 51 percent to $1.32 billion, from $873.5 million in the prior-year period.
• Analysts were expecting a profit of 51 cents per share on revenue of $1.19 billion, according to a poll by Thomson Financial.
• CB&I said the quarter was boosted by the integration of oil and gas production unit Lummus Global, which it bought from Swiss power transmission and automation company ABB Ltd. in November. However, CB&I said the quarter was hurt by an underperforming project in its Europe, Africa and Middle East region.
• New contract awards for 2007 totaled $6.2 billion, an increase of 40 percent over 2006.

Guidance

• Engineering and construction services company Chicago Bridge & Iron Co. NV on Wednesday issued a 2008 earnings prediction above Wall Street's expectations.
• The company expects earnings of $2.40 to $2.65 per share, on revenue of $5.9 billion to $6.2 billion. Analysts expect CB&I to report a profit of $2.39 per share on sales of $5.97 billion.
• The company predicts new contracts will total $6.5 billion to $7 billion, compared with $6.2 billion in 2007.

Now compare results from this sort of company or others I hold with very large global exposure to URS (URS) which is another infrastructure stock, but is dependent on that before-mentioned debt laden, currency devalued, crony government country (which will be booming in 6 months). Even in infrastructure, it pays to avoid the US of A. How sad; especially in a country with massively sagging infrastructure. Your tax dollars are too hard at work going to special interests, fighting wars or paying for national debt interest to take care of roads, bridges, and minor things like that. Keep in mind that as LOCAL governments (which cannot print money magically and must balance their budgets) get hit by a drop in revenue from tax assessments, cut backs will be coming in a large way in 2008-2009. Thankfully our federal government doesn't need to bother with such constraints - so we can spend into a black hole.

URS Sees Difficult 2008

• URS Corp., an engineering and construction company, on Tuesday offered fiscal 2008 guidance below analyst expectations amid a difficult public infrastructure spending market.
• The company predicted earnings between $2.24 and $2.36 per share, or $2.61 and $2.73 per share excluding costs related to URS' November acquisition of Washington Group International Inc. Analysts polled by Thomson Financial expect earnings of $2.89 per share, on average.
• "We expect a near-term slowdown in public infrastructure spending as a result of the current economic downturn and the increasing budget challenges facing state and local governments," said Martin M. Koffel, company chairman and chief executive, in a statement. "It is prudent to assume that, as a leading infrastructure firm, our 2008 results will be tempered by the weakness in this market."

Disclosure: Long Chicago Bridge & Iron in fund; no personal position

Comments

[granger:]

Great detail, thank you.

2008 Feb 29 05:57 AM

[valueinvest...:]

Trader: I seem to be coming across more of your articles lately. I recently bought CBI at under $37 and view it as a great long term buy and hold candidate at these levels. Though the market has been choppy and infrastructure has performed poorly this year, I found the valuation to enticining to pass up. I think one thing you fail to mention in this piece which Lehman Brothers picked up on is that if you strip out the U.K. LNG related charges then CBI would have likely earned approximately 48% more in EPS ($0.82 in addition to the reported $1.71) and gross margins would have been 32% higher (10.8% vs. the reported 8.2%). This is very significant since the South Hook LNG project is now 85% of the way done. I also love the valuation. Guidance for 2008 was $2.40-$2.65, but let's just assume CBI will earn $2.50. This means that the stock currently has a P/E of around 14.8 (using a $37 stock price), on earnings growth of 46%. That is ridiculously cheap. Obviously, it has gone up some since I bought it (boosted today by GS adding it to its conviction list), but I love this stock for the long haul and think this is one of those names which has been thrown out unfairly by people's propensity to sell.

2008 Mar 28 12:36 PM

[TraderMark:]

value, I wonder if people think its based on Chicago or something ? :)

The action has perplexed me, I'm a big infra fan. Lots and lots and lots of resistance in the chart at $44-$45. It will need to get back over that level to bring back the momentum guys. But its a heck of a value here. Been concentrating on FWLT, FLR, and MDR of late.

SGR is also strangely weak.

I think people think projects will get cancelled or they are reliant on US credit markets for their customers to get funded for said projects. True for the more US based infra, but most of these are heavily global with customers in Asia and Middle East (cash rich)

but you cannot talk sense to a herd :) Still like the long run, technically its broken in the near though.

2008 Mar 28 02:58 PM

[valueinvest...:]

Trader: I know nothing about technical analysis. I never utilized it when I used to invest in college and pick ideas only for my personal account and it has never been stressed at either of the two firms that I have worked for since getting into the business. Therefore, I cannot have a technical conversation with you on any idea. The biggest reason CBI has sold off is because investors are worried about a global recession. While I do not believe in "decoupling" I think the idea of a global slowdown (if it happens) will have little impact on CBI for several reasons. The first is that the spending countries are doing on infrastructure is not discretionary spending. The fact is that these countries need this infrastructure. Second, even if there is a global slowdown, the parts of the world that are doing this infrastructure buildout are extremely flush with cash and a shortage of cash for this infrastructure buildout is not going to happen.

The size of the buildout is also staggering. Allow me to use a Citigroup report on FWLT to illustrate this point. Citigroup noted that, "On 2/5/08 the CEO of Kuwait Petroleum Corp noted his company plans to spend $51 billion dollars over the next 6 years for upstream and downstream oil and gas projects. This follows Saudi Arabia's plans for $95 billion in energy infrastructure over the next 5 years." I would further note that even though they lost the project to Bechtel, CBI almost got the Liquid Niugini project which was worth $6.5 billion. This means that CBI is coming in second for some projects which alone could almost double their backlog. Obviosuly, if CBI had won this project, the stock would not have been as cheap, but they may be able to get one of these great projects in the future which would act as a huge catalyst for the stock.

I also like the fact that these infrastructure projects are feasible at $50-$60 a barrel because it means that oil can drop 40% from here the projects will continue. This is especially important to me since I have no idea where the price of oil will be in the future.

The one issue that could be tough for CBI is more a result of the analysts who follow the company than anything the company has done. I think all analysts have rated this stock some form of "buy" and often their earnings estimates are higher than what the company has given. This is because the analysts believe that the company was conservatve when giving guidance. While I agree that CBI may have been overly conservative, this sets up for a situation where CBI beats their own projections, but misses consensus and the stock trades down.

2008 Mar 29 12:30 PM