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Private Wealth Manager / Securities Expert / Co-host of "Investing and Your Legal Rights" heard monthly on Over 33 years in the investment industry, first working at PaineWebber for almost 20 years which included 3 years as a branch manager. Currently have a CRCP... More
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Covered Call Focus
  • Buy Chicago Bridge & Iron Co. (CBI) & Write A Call  0 comments
    Sep 23, 2013 10:28 AM | about stocks: CBI

    09/23/13 Covered Call Pick: Chicago Bridge & Iron Co. (NYSE:CBI)

    Chicago Bridge & Iron (CBI) is an American based, multinational engineering, procurement, and construction company for the hydrocarbon, oil and gas, chemical, power, water, and metals industries. The company is based out of The Woodlands, Texas (not its namesake surprisingly) employs over 50,000 people that work on a wide range of projects from the construction of liquid natural gas plants in Peru, to Oil sands storage tanks in Alberta, Canada, to a grassroots nuclear contract in the United States.

    Chicago Bridge & Iron has a market capitalization of $7.15 billion with 107.3 million outstanding shares.

    Chicago Bridge & Iron currently pays a $0.05 quarterly dividend for a current yield of 0.3%.

    With a beta of 1.28, CBI trades with approximately 30% more volatility than the current market.

    We've talked about the natural gas boom in the United States in the past, and have recommended more than one stock that has been focused to take advantage of what is becoming an domestic energy revolution. With the increased technology in the energy sector allowing companies to use techniques such as fracking and horizontal drilling to get at gas and oil reserves in the ground, the construction of additional wells, storage facilities, and pipelines is vitally important to keep up with the amount of oil and gas coming out of the ground. That is where CBI comes in.

    Even though CBI doesn't exactly live up to its name as its not located in Chicago, doesn't make bridges, and doesn't use iron, it does live up to its reputation as one of the best construction and services companies for the energy, industrial, chemical, power, and metals sectors. What they are great at doing is making infrastructure, and infrastructure is what makes our world go round. CBI focuses on refineries, oil terminals, and LNG export/import terminals, as well as storage tanks for water and oil, and even pipeline construction. Without this type of infrastructure, there isn't anything to move the resources, and nowhere to store it once its removed for the ground, and if it's staying in the ground then the energy companies aren't making money. For the domestic energy boom to continue, the infrastructure needs to be there, and CBI is the one to build it. An important metric in demand for these projects is New Awards. New Awards is the amount of new contracts brought in over a specific time, and is used to predict future sales as the projects come to completion. Along with backlog, value of projects booked but not billed, you can get a measure of demand that a company has for its services and a decent approximation of future cash flow. Through 2012, CBI generated $7.3 billion in new awards (+7% yoy) and had $10.9 billion in backlog by the end of the year (+22% yoy). This shows that there are more projects out there than CBI can even get to, despite being one of the largest companies in their industry. This is a good indicator of continuing demand moving forward, which means a healthy portfolio of projects, and increasing revenue.

    CBI isn't just involved in classical energy plays either. The company actually has a history of building components for nuclear energy plants, and have constructed some portion of 75% of all the United States' active nuclear power facilities. This past February, CBI completed the acquisition of its competitor the Shaw Group, which not only HEAVILY bolstered its oil/gas business, but also significantly increased its nuclear power plant construction exposure, allowing the company the prime position for any global resurgence in nuclear power plant construction.

    CBI is also another target of legendary investor Warren Buffett and his company Berkshire Hathaway. In the first quarter Berkshire Hathaway bought 6.5 million shares of CBI, representing about a 6.1% ownership in the company, its biggest new stock purchase. The business is showing great earnings growth potential, as well as a mid-cycle valuation. Businesses such as CBI are highly cyclical, meaning there are alternating periods of lean and fat years for its business. During the middle of these cycles (while its demand is on the rise) the stock is normally valued between a P/E of 16 to 19. Currently, the stock is just at the higher end of that valuation range, but still below the P/E of 22 that accompanies the height of its cycle. This fact combined with its earnings growth estimates (35% in 2013 and 23% in 2014) and the global need for energy infrastructure creates a story of both value and growth in CBI.

    For a Covered Call strategy on CBI we are looking at the April 2014 $70 Calls. The stock just broke out to the upside from a technical consolidation period, and is thus poised to go higher - hence the out-of-the-money Call. Due to the low quarterly dividend amount though, we want to get paid now for our investment, which is why we're not going further out. The premium from selling this Call will also give us some downside protection down to the stock's 50-day moving average, a strong technical support level, in case something should go awry with the markets. That is why we are buying CBI and selling the April 2014 $70 Call.


    • Buy 100 shares of CBI @ $66.56 = $6,656 + Commission ($12.95) = $6,668.95
    • Write 1 CBI April 2014 $70 Call @ $3.60 - Commission ($8.70) = $351.30

    Note: Prices may vary from the time of post. Actual commissions paid will vary returns.

    Static Return (Not Called):
    (Call + Dividend)/Stock Price X (Days/Year)/Days to Expiration

    (3.51) + (2*0.05)/66.69 X (365)/206

    = 9.59% Static Return

    If-Called Return:
    (Call + Dividend + Strike Price - Stock Price)/Stock Price X (Days/Year)/Days to Expiration

    (3.51 + (2*0.05) + 70 - 66.69)/66.69 X (365)/206

    = 18.39% If-Called Return

    Disclosure: Clients and/or principles of OakTree Investment Advisors may or will have an investment in the above positions, but only on the same sides of the trades. The above numbers are analytic estimations based on information known at the time of this post. OakTree Investment Advisors does not guarantee the above, or any, result. All investment decisions should be made based upon individual's personal investment goals and risk tolerance.

    Posted by OaktreeAdvisors at 9/23/2013 9:50 AM
    Categories: Weekly Picks

    Previous Post

    Disclosure: I am long CBI.

    Additional disclosure: OakTree Investment Advisors are active money managers and will add positions is CBI, sell covered calls and may liquidate if appropriate.

    Themes: Call Options, Write a Call Stocks: CBI
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