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We have already discussed in detail how Chicago Bridge & Iron (NYSE:CBI) and KBR Inc (NYSE:KBR) might be the main beneficiaries of the multi-billion dollar investment expected in the Engineering & Construction Industry. More than $50bn is expected to be spent in the areas of gas processing, fractionation, petrochemicals, LNG exports and gas power. Both the companies recently reported their third-quarter earnings. Below is the earnings review for both these stocks as well as re-iteration of our investment thesis.

CBI

CBI posted a mixed Q3 result. The company topped EPS estimates by one cent. Following table shows the summary:

($)

Actual

Estimates

Surprise

YoY Change

Sales

1.41b

1.48b

-4.7%

15.20%

EPS

0.82

0.81

1.2%

13.80%

Despite the failure to meet revenue expectations, investors were delighted by the results as the company achieved double-digit growth in both its sales and net income. The rise in earnings was attributed to the strong performance in its E&C and Lummus-Technology segments. The strength in these segments offset the weakness due to fewer new awards and poor performance in the steel-plate structure business. The overall new rewards declined from $3.8 billion to $0.93 billion. This reflects a 76% decline. However, backlogs remained strong. They increased from $9.2 billion to $9.5 billion.

The company, in its earnings call, mentioned that it is well-positioned to benefit from the new opportunities in the industry. Such opportunities are expected by the market, especially, with regards to the shale gas boom. CEO Philip Asherman is optimistic about the future and believes that significant growth opportunities with regards to U.S. petrochemicals and global LNG will be available in the future. Also, the company believes that it will complete acquisition of SHAW Group (NYSE:SHAW) by the first quarter of next year. Acquiring SHAW will not only help CBI strengthen its construction business but also gain increased market share in nuclear maintenance-related work.

The stock pays a dividend yield of 0.52%. Bloomberg reports that the dividend has grown by almost 10% in the last 5 years. The margins are also on a rise. Gross margin expanded by 140 bps YoY, to 13.1%. The increase in margins reflects the high level of license sales. Operating margins also expanded YoY by 150 bps, helped by reduced S&A expenses. The company's operating and free cash flows are also positive. Given the expansion in revenue, earnings and margins, the stock is recommended as a buy.

KBR Inc

KBR's story is a bit different. The stock has been down almost 6% since its earnings release on October 24. The company missed both sales and profits estimates. Not only that, the company also reported a YoY decline in sales. Profits recorded on a GAAP basis also declined and, in fact, became negative.

($)

Actual

Estimates

Surprise

YoY Change

Sales

1.99

2.23

-10.8%

-16.60%

EPS

0.65

0.65

-

4.80%

The company's loss was converted into profit by excluding a one-time impairment charge of $178 million. What has been bothering investors is the decline in the top-line of the company. The company has three segments; Hydrocarbon, Infrastructure, Government & Power (IGP), and Service Operations. The revenue for two of the three segments fell. Revenue for the Hydrocarbon segment fell by 0.3% and revenue for the IGP segment decreased by 51%. Most of the IGP revenue was attached to construction contracts in Iraq and Afghanistan, and revenue decreased drastically because of less U.S. spending in these regions in the year. Only Service Operations recorded an increase of 13%. Strong results for Service Operations shows the improvement in the U.S. construction market. Most of the people have high hopes with regards to the Hydrocarbon segment, which is responsible for the design and construction of liquefied natural gas and gas-to-liquid facilities, something which is directly linked to the shale gas boom.

Margins have also been on a decrease. However, one should not forget that the company is well-placed in the industry to benefit from the potential construction boom due to shale gas. The stock is trading at a cheap valuation of 9x. Operations are generating positive cash-flows. With the stock trading at cheap valuations and given the expected growth, the stock is recommended as a buy.

Source: 2 Stocks That Will Benefit From A Multi-Billion Dollar Investment Boom