Chicago Bridge & Iron is a good buy post recent results

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Feb 26, 2015

Chicago Bridge & Iron Company (CBI, Financial) recently reported strong fourth quarter results. CB&I adjusted net income was $161.3 million, or $1.47 per diluted share, excluding acquisition and integration related costs. Revenue for the fourth quarter was $3.4 billion with new awards of $3.3 billion. Despite a ~15% increase in stock price post earning, the stock still appears to be a good buy. The company has an impressive track record of growth and is trading at 8.44 times its FY2015 EPS estimates. Here’s a look at the company in detail.

Founded in 1889, Chicago Bridge & Iron Company N.V. provides a wide range of engineering, construction and procurement services to customers in the energy infrastructure market throughout the world. The company has seen good growth – both organic and inorganic –Â over the last few years. The following table shows CB&I's financial and operating data for the last three years. (Source:10-K filing)

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The company's diluted EPS has increased from $3.07 in FY2011 to $4.98 in FY2014. In the same period, its revenues have more than doubled to $12.97 bn aided by the Shaw acquisition. According to sell side estimates, the company's topline and adjusted EPS are expected to grow 10% and 8%, respectively in the current fiscal.

Despite this strong performance, Chicago Bridge and Iron's stock price has declined by ~ 50% over the last few months. The biggest culprit was the decline in oil prices. Investors were also worried about geopolitical factors like the Russian sanctions which may affect the company's technology sales. While investor concerns surrounding these headwinds are valid, the extent of correction seems a bit excessive to me. On its latest earnings call, the company's CEO, Mr. Philip Asherman, stated, "We project less than 5 percent of our revenue from new bookings could be affected by timing risks associated with lower oil prices.” He guided for revenues to increase to $14.4 billion to $15.2 billion in FY2015 and EPS to be between $5.55 and $6.05.

I believe investors are misunderstanding the company's fundamentals. The company's earnings are unlikely to decline meaningfully in the near term given its strong order book. Further, the company's exposure to gas-fired power plant projects should partially offset any decline in oil-related work.

Chicago Bridge and Iron's business is a long lead time one with high visibility. The company received $3.3 billion in new awards for the fourth quarter, and its order book stood at $30.4 billion at the end of FY2014. The company's healthy order book and award wins provide a good visibility into the company's near to medium term revenues which should reassure investors.

Chicago Bridge and Iron should also benefit from an acceleration in gas-fired power plants projects in 2015. Markets in the United States are showing acceleration in the pace of gas-fired projects to replace coal plant retirements. Chicago Bridge and Iron has been focusing on this market for quite some time. Recently, the company signed a significant strategic agreement for NET Power – CB&I's collaboration with Exelon, Toshiba and 8 Rivers Capital. As a part of this agreement, CB&I will be an exclusive partner and contribute the expertise to engineer, procure, construct, commission and test a 50-megawatt natural gas-fired electricity generating demonstration plant. This will be a first-of-a-kind demonstration plant to validate a new natural gas power system that produces zero atmospheric emissions. If successful, it represents a potential game-changing opportunity to comply with clean energy regulations.

Chicago Bridge & Iron is trading at 8.44 times FY2015 EPS. Last quarter, billionaire hedge fund manager David Einhorn (Trades, Portfolio) initiated a long position in its stock buying 2.94 mn shares. Out of 21 analysts covering the company, eleven are positive and have buy recommendations, six have hold ratings and four have sell ratings. Given the company’s good growth prospects and reasonable valuations, I recommended buying the stock.