George Fisher's  Instablog

In 1997, I was researching companies that offered direct stock purchase plans.  These are shareholder programs that allow individual investors to purchase stock directly from the company or its transfer agent.    I stumbled on a name – Chicago Bridge and Iron (CBI - $20), and since I was living just north of Chi-town at the time, it peaked my interest.  I have been a shareholder since.

Founded in 1889, Chicago Bridge and Iron is no longer a Chicago company and does not make bridges that span the Cal-Sag Channel.  It is a Netherlands –based engineering and construction (E&C) company that focuses on energy infrastructure.  As a direct result of increasing global energy demand, infrastructure needs to be replaced, upgraded and expanded.  CBI benefits from projects that are heavy to storage of liquids and gasses, like LNG export terminals and LNG storage facilities , oil refineries and oil storage facilities, water storage and water treatment.  Hidden within the company is a long-seated expertise in nuclear power plant construction.  As a construction and engineering company, CBI is awarded contracts with multiple year time-tables, and energy projects are getting bigger, more complex, and more expensive.  For example, CBI has been recently been awarded several contracts for new LNG export terminals in Australia along with a new oil refinery in Columbia.  The Columbia refinery work could be worth upwards of $1.4 bil.   In addition to larger headline-grabbing developments, CBI historically books around $400 mil per quarter in additional orders from small to midsize projects.  CBI is an international company with projects across the globe.  North America business represents around 37% of revenues, South America 22%, and the balance of international is about 40%. 

Revenues have been choppy with the global downturn as numerous projects were put on hold due to economic uncertainty or financing, or both.  As long-term energy infrastructure needs have not dissipated, many of these delayed projects will eventually be built.  2008 revenues were $5.9 bil, while 2009 revenues are estimated at $4.5 bil.  Going forward, 2010 revenues should be a flat to low growth due to the time lag between booking a project and completion – typical in the E&C business.   2011 and beyond should experience a return to steady incremental growth.

Reported order backlog is the value of business that has been awarded to the company, but not completed.  As a precursor to future revenues, trends in backlog levels are an important indicator of future company performance.  CBI has been booking business quite actively and has grown its backlog to an estimated 2009 exit total of $6.5 bil, with an estimated $1.7 bil of new awards from major projects in last three months. Halfway through 09, CBI’s backlog stood at $4.2 bil, indicative of the growth in business during the 2^nd half of 2009.  This momentum should continue in 2010.  A key business metrics is the Book to Bill ratio, which compares new project order intake with billings revenues.  Currently, CBI is running about 2.8:1, or is booking 2.8 times in new business compared to its billings of completed contracts/progress payments.  This is a great indicator of future revenues and profits, albeit the ratio has risen from depressed levels, and should return to a more normal range of 1.2 to 1.5. 

CBI is dependent on the capital expenditure budgets of major energy companies and government entities.  Healthy levels of cap ex by oil companies are directly tied to the price of oil.  With oil generally expected to be in the $70 to $80ish range and natural gas in the $5 to $6ish range, along with a return to increasing energy demand, it appears CBI’s current growth trend could continue at an annual pace of around 12%+.

E&C contracts are bid either on a fixed cost or variable cost basis.  Buyers like fixed, E&Cs like variable.  CBI took a fixed cost contract to build the South Hook LNG terminal in England that experienced substantial cost overruns and, thankfully, will be completed in the 1^st qtr of 2010.  The vast majority of 2008 eps loss is directly tied to overruns on this contract.  After this experience, management has become increasingly more conservative in its pricing. 

CBI has been stressing their service of providing more assistance in initially designing infrastructure projects, or FEED (front-end engineering / design).  By working closely with planners, the company has a better understanding of both the complexities of a project and the needs/desires of the buyer.  This service will help not only differentiate CBI from its competitions, but subsequent bids become more accurate.  CBI provided FEED services to the Columbian refinery project for two years prior to being awarded the contract. 

Earnings in 2009 are estimated around $1.75 per share, and increasing in 2010 to around $1.80 to $2.00. As business improves and revenues return to a sustainable $6 bil level, it is very possible CBI can earn over $2.40.

CBI is a mid- to late-cyclical stock that will benefit from a continued global economic recovery.   My personal price target during the next 12-24 months is $30.00, a reasonable 15x $2.00 eps.   I have CBI as a long-term core holding within the energy and oil related sector that currently offers above average potential returns.  CBI is worthy of your due diligence.