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Chicago Bridge & Iron, A Buy?
Posted by: Crafool (IP Logged)
Date: June 18, 2013 04:01PM

Chicago Bridge & Iron is a very interesting company that has hit the screens of many investors recently since Warren Buffett's Berkshire Hathaway disclosed its over 6.5 million share purchase. The size of the purchase doesn't necessarily indicate that it was Buffett or one of his two portfolio managers. It is definitely at the higher end of the managers' position size limits, but not clearly a Buffett size of over $400 million. Regardless, Berkshire's managers as well as Buffett make it worthy to discuss and possibly consider investing in the company.

Chicago Bridge & Iron (CBI) is the energy infrastructure as well as infrastructure (bridges, rail, etc.) in the United States and world. CBI as a stand alone in my opinion looks like what you would call "a great company at a good price". How do I arrive at this? Well from a quantitative stand point I like to think that CBI according to the March 29th of 2013 Value Line report has total long-term debt of $800 million and net current balance sheet indicates that the company has a net current asset position of around $949.1 million. Thus, if we subtract the total long-term debt from the current asset position, we see the company has a net current asset position of around $149.1 million. The company has around 105.8 million shares outstanding and so this means there is around $1.40 per share of net current assets. So the company's share price of $61 (6/18/2013) could actually overstate the enterprise value of CBI by that amount, and the net current asset position seems to indicate the company has a very solid balance sheet. (Balance sheet risk seems to be low.)

The enterprise value of CBI seems to be around $59.60 per share. Again referring to Value Line, I see earnings estimates for the next 4 quarters coming to around $4.07 per share and for 2014 an EPS estimate of $4.30. These earnings per share numbers indicate that CBI in the next year and a half could have earnings yields of between 6.82% and 7.21% after tax. For comparison purposes to other investment yields, I would like to consider that CBI's estimated tax bracket is 28%. Thus, the earnings yields on a before tax basis would be 8.72% and 9.22%. These earnings yields compared to a 10-year Treasury Bond yielding around 2.20% looks very attractive currently.

As we all know, one day interest rates will rise and given that the 10-year Treasury bond historically yields around 6%, it will be important that CBI's earnings rise as well to keep its earning yield above the treasury bond yield. So it becomes a question about CBI's future earnings potential as well as its ability to raise the price of its services in the face of inflation.

As many of you may have heard, America has a sort of "Renaissance" going on that has started with the worldwide demand for energy and the general increase in labor costs. Expensive energy and technology has allowed America to finally get use out of its vast oil shale reserves. This is not a here today gone tomorrow sort of event, but rather an event that will last for some time and require substantial investment in infrastructure. America has this new opportunity, but unfortunately our energy infrastructure is "outside-in" versus "inside-out" that is needed. You see we have set this country up for importing of energy with much of the energy refining and infrastructure on the coasts to handle our oil imports and not with infrastructure in our country set up to export this new energy supplies. Natural gas liquefaction terminals will need to be built as well as refinery capacity. Natural gas for utility use will most likely decline as prices rise as exporting it is more profitable and nuclear power will be added with the construction of new plants. Rail roads will need to be maintained and as bridges in this country continue to fall down more will needed to be replaced as our nation's infrastructure needs upgrading (Not too mention that some in the U.S. want more economic stimulus in the form of an "Infrastructure" investment program. As you can see, these sorts of products will need a company that can be relied upon and not necessarily a company with the lowest bid. (Think inflation protection. Being the best at what you do means inflation doesn't effect you nearly like it affects your competition).

So given the above it appears CBI's future looks bright. (Side note: They say that GE has always been a great finder of the big trends. GE just sold off its broadcast network NBC, but just announced its intent to purchase Lufkin Industries, a great provider of equipment to the energy industry.) CBI's value to Buffett's Berkshire Hathaway? In my opinion, probably far higher than the stand alone value of CBI today. I think Buffett has to be pretty familiar with CBI and its services. Berkshire Hathaway owns the Burlington Northern Santa Fe with its thousands of miles of railroad track and bridges (CBI does railroads), own U.S. gas/oil pipelines (BRK has about 10% of the nation's pipelines, BRK wants to build and own more pipelines (CBI builds and maintains pipelines), owns Mid-American Energy and soon to acquire Nevada Energy (CBI builds power plants and nuclear plants) and owns one of the largest catastrophe insurance company in the world that has to rebuild when things go down like utilities plants, bridges, etc. to name a few parts of how Buffett might see value past others in CBI. CBI as a wholly owned company would be very profitable, efficient and effective to Buffett and Berkshire Hathaway.

So in my opinion I see this company as a great company at a good price, and not a fair company at a great price. Buffett was recently asked about his acquisitions and investing in a CNBC interview. He said he was looking and may make a purchase in Europe. Buffett is a funny guy that likes to lay it out there for you to see, but you just cannot. Chicago Bridge & Iron is a Netherlands company!

Happy investing to all. Please do not use my person recommendation or actions but rely solely on your own research and consider your own personal investment situation. Disclosure: I am long CBI, GE and BRK.A and B.



Stocks Discussed: CBI, BRK.A, GE, BRK.B,
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