Chicago Bridge & Iron Company (NYSE:CBI), founded in 1889 in Chicago, is the most famous energy infrastructure focused company in the world and a major provider of government services. In late 2000, CBI embarked on a series of acquisitions that have expanded its services to encompass the entire hydrocarbon industry, from conceptual design through technology licensing, engineering and construction, to final commissioning and technical services. CBI acquired Lummus Global from ABB on Nov. 19, 2007, adding approximately 3,000 employees to the CBI payroll. On Feb. 13, 2013, CBI completed acquisition of The Shaw Group for a purchase price of US$3.3 billion and CBI now employs nearly 50,000 people.
1. Worldwide Record of Excellence
CBI’s integrated business model, flexibility and nearly 125 years of experience working all over the world make them unique among competitors. Members of their senior leadership team have an average of approximately 25 years of experience in the engineering and construction industry.
2. Company Culture and Reputation
Their relentless focus on safety, unmatched talent, superior project delivery and uncompromising business ethics have been the base of their reputation and have allowed them to build lasting relationships with clients worldwide.
3. Strong Health, Safety and Environmental (“HSE”) Performance
CBI’s dedication to safety makes them among the top tier of safest companies in the industry. In 2012, after completing more than 70 million work-hours around the globe, CBI achieved a lost time incident rate (LTIR) of 0.01, which means they had only one lost time incident for every 20 million hours worked. This outstanding record includes the achievement of zero lost time incidents in their Project Engineering and Construction sector over an expended 40 million work-hours.
4. Integrated Business Model
CBI is comprised of three business sectors: Steel Plate Structures, Project Engineering and Construction, and Lummus Technology. Through these business sectors, they offer services both independently and on an integrated basis.
5. Government Solutions
They lead large, high-profile programs and projects, including design-build infrastructure projects, for federal, state and local governments.
Valuation of CBI stems from two main models – FCFF and PER
We evaluated CBI using an absolute valuation model and a relative valuation model. We are convinced that the most appropriate techniques for CBI are the Free Cash Flow to Firm (FCFF), and the Price/Earnings Ratio (PER). The first incorporates the long-term growth opportunity, and the second reflects the market valuation.
Discounted Cash Flow Model: Free Cash Flow to Firm (FCFF)
Main Assumptions and Forecasts
(1) First, the cost of equity was determined by the CAPM model, using the 10-year government bond risk-free rate of 2.15%, the market return (2012) of 14.17% and the beta of 2.00 (at the end of 2012) to reflect the cost of equity of 26.19%. Second, the cost of debt was calculated from short-term lending rates (credit rating BBB corresponding to around 5%) considering the tax shield effect (tax rate is 32.57%), which was 3.37%. Third, WACC was the weighted average of the cost of equity and the cost of debt with weights of 62.89% and 37.11% respectively, which was 17.72%.
(2) From CBI’s past performance, we estimated a growth rate in revenue of 13.30% in the forecast horizon (2013 to 2017). In terms of continuation value, the growth rate is estimated as 2% beyond the forecast horizon. This is because the growth rate for the long term should be less than the average GDP growth rate.
(3) We use moving median of previous four year data to calculate the pre-tax margin, interests, investment for property, plant and equipment, intangibles, total current assets, and total current liabilities.
Value of Firm = PV (Cash flows over forecast period) + PV (Continuation Value)
Based on the FCFF model, the estimated price at the end of 2013 is around US$45.58.
Multiple Valuations: Price to Earnings Ratio (PER)
From a short-term point of view, the PER accounts for the market valuation during macroeconomic is uncertain. We used the P/E Band to get the price range. Over the past five years, CBI was traded between 5.2 to 22.8 times. We used the median PER band value of 14.5 to calculate the eventual price. With this method, we got the final price of CBI at US$48.14.
Weighting of the Models
The shareholding structure of CBI serves as a proxy for the allocated weights to these two models. 81.31% of CBI shareholders are institutions and insiders, the 18.69% of shareholders is free float. The FCFF is more widely used by institutional shareholders and management executives shareholders who are long-term oriented. On the contrary, the PER better mirrors shareholders.
By combining two valuation methods to account for the company’s intrinsic value and the market sentiment, as well as factoring in the growth potential, the fair price for CBI is US$46.04. Compared to the current price of US$59.39, it seems not a good time to buy right now.
Risks to Price Target
The FCFF model relies mostly on the Terminal Value, which is determined largely by the assumed perpetual growth rate. In addition to the risks of the perpetual growth rate, the risks of multiples entail subjectivity of the multiples themselves, being susceptible to the market conditions.
Relative advantages ensure stable development
You can check the four direct competitors of CBI here. They are Vinci, Grupo Carso, S.A.B. de C.V., MasTec Inc. and Singapore Technologies Engineering Ltd. CBI’s ROE of 2012 is 22.05%, slightly lower than Singapore Technologies Engineering Ltd. Although CBI’s three driving factors of ROE have no absolute advantages compared to competitors, they do have comparative advantages. The operating capability, profitability and financial structure of CBI are balanced and healthy to guarantee the stable development of the company.
1. In April, CBI fell admit speculation that Woodside Petroleum Ltd. might change its strategy regarding a major liquefied natural gas project. In other words, investors in the stock do face some risk of projects falling through or being altered.
2. Chicago Bridge & Iron does not have a definable strategy. Therefore, it risks losing out to firms that concentrate on one particular competitive advantage.
Overall, CBI is a good company with balanced and healthy operating capability, profitability and financial structure, yet the market is too optimistic. The stock price now is higher than the intrinsic value at the end of 2013. Therefore, it is not a very good time to buy the stock, yet we should still watch this company.