valueinvestor123

Why I am Closing Chicago Bridge and Iron

This is the time to be buying CBI, not selling it. If you are going to own infrastructure names, your time horizon must be years not months.

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

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.

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

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.