This Infrastructure Builder Is Charged Up
The old joke about Chicago Bridge & Iron (NYSE: CBI) is that the company’s not in Chicago, doesn’t build bridges and doesn’t use iron. Instead, CBI, which is run from Texas and taxed in the Netherlands, is a leading designer and builder of energy infrastructure.
The company did get its start as a Chicago bridge builder in 1899, but soon shifted to the construction of liquid storage tanks for railroads and the oil industry. Now its projects run the gamut from liquefied natural gas (LNG) export and import terminals to refineries and nuclear reactor containment vessels. With capital spending on energy infrastructure around the world now topping $1 trillion a year and 95 billion-dollar projects currently on the drawing board, Chicago Bridge & Iron is uniquely positioned to capitalize on the technological and economic changes transforming the industry.
CBI gambled heavily last year on a pricey takeover of power plant builder Shaw Group, a company of similar size. The merger, completed last month, balanced CBI’s mostly international footprint with Shaw’s largely domestic exposure, diversified the client roster to include many US utilities and gave the combined company the extra heft it craved to become an indispensable partner on many of the coming mega-projects.
Source: Chicago Bridge & Iron investor presentation
Wall Street initially jeered the lofty 72-percent premium CBI paid for Shaw, pushing CBI shares down 14 percent on the day of the announcement. But CBI managed to finance its big deal with a rather inexpensive loan, and has said the acquisition will boost earnings per share 10 percent this year. Since bottoming out in mid-November, the stock has been on a relentless climb, advancing 58 percent. At $58, it’s still a bit below the record highs notched in early 2008 but worlds away from the $5 low reached a year later, when it seemed as if no one needed any energy and nothing would ever get built again.
The Shaw acquisition carries significant risks. It expands CBI into an industry in which it lacks in-depth experience and will test its excellent project-management skills on the complicated and iffy business of building new nuclear power plants in the wake of the Fukushima accident.
CBI and Shaw had already been collaborating on the first two nuclear plants under construction in the US since the Three Mile Island disaster, with Shaw building the reactor modules and CBI responsible for the containment domes. These projects have encountered cost overruns and delays, and Shaw has taken charges on other power projects as well. But investors have become increasingly confident in recent months that CBI has a good handle on Shaw’s commitments, confidence boosted by the fact that CBI’s own big projects remain on budget and on track.
On the other hand, the acquisition doubled CBI’s workforce to 50,000, amid an infrastructure building boom that is demanding ever-rising numbers of skilled workers. It offers the chance to sell Shaw’s construction expertise to CBI clients in the petrochemical industry. And it added the predictably recurring revenue from Shaw’s plant services and environmental contracting units, lessening CBI’s reliance on lumpy construction contract awards.
In fact one Shaw shareholder, Denali Investors, lobbied aggressively against the sale last year, arguing that the takeout price was too low given the recent disposal of underperforming Shaw’s businesses and investments, increasing demand in new power plants and the ample cash on Shaw’s books, used by CBI to help finance its purchase. Denali alleged that Shaw’s chairman and CEO rushed the sale through without the usual open bid solicitation to further his political ambitions. But shareholders of both companies approved the deal, even if the subsequent performance of CBI’s shares has lent some credence to Denali’s arguments on valuation.
What’s indisputable is that the old CBI entered the merger with plenty of business momentum. Revenue rose 21 percent last year and earnings per share jumped 20 percent, both in excess of expectations. The contract backlog swelled 21 percent as well thanks to a strong $7.3 billion of new business. That included $2.9 billion in the most recent quarter for storage tanks and spheres in Saudi Arabia and Ecuador, a carbon dioxide removal plant for Exxon Australia, offshore marine work in the North Sea, petrochemical technology in Singapore, South Korea and the US, and so on.
Source: Chicago Bridge & Iron investor presentation
CBI is projecting another 19 percent sales increase this year on a standalone basis excluding the Shaw’s acquisition. On the same basis, the midpoint of the earnings per share guidance assumes a 14 percent increase in 2013. It will present guidance for the merged company at Thursday’s investor day. Earlier this week, out-of-the-money May call options on CBI shares were selling briskly.
Shaw’s has attractive niche businesses such as its pipe-making business, a natural fit with CBI’s storage expertise. And its government environmental contracting business, potentially including a lucrative contract at a plant that will convert weapons-grade plutonium into reactor fuel, contributed nearly as much revenue before the merger as the power plant building unit.
CBI has a record of capitalizing on canny acquisitions. In 2007, it paid $950 million to ABB for Lummus, a supplier of process technology and catalysts to the petrochemical industry. That unit’s revenue soared 35 percent this year amid high demand for its refining catalysts and a proprietary process for synthesizing a key rubber ingredient. And Lummus had a 26 percent profit margin, accounting for nearly 30 percent of CBI’s income.
Meanwhile, CBI’s expertise in liquified gas storage places it on the leading edge of a rapidly growing transcontinental trade in this increasingly attractive fuel. It’s conducting the preliminary engineering surveys for the conversion of LNG import terminals in Freeport, Texas and off the coast of Maryland into export facilities. But these aren’t as big as some of the pending LNG construction projects for which CBI is competing. Contracts are due to be awarded this year for for a $30 billion LNG export terminal to ship Australian natural gas to east Asia, and another such facility near a huge gas field on the Arctic coast of Russian Siberia.
Rapid advances in drilling and transportation technologies mean that the locations of energy sources and the methods for converting them to power are changing faster than ever, stoking huge demand for new energy infrastructure. The newly enlarged CBI stands out as a major beneficiary. We’re adding it to our Growth Portfolio. Buy CBI shares below $70.
The company did get its start as a Chicago bridge builder in 1899, but soon shifted to the construction of liquid storage tanks for railroads and the oil industry. Now its projects run the gamut from liquefied natural gas (LNG) export and import terminals to refineries and nuclear reactor containment vessels. With capital spending on energy infrastructure around the world now topping $1 trillion a year and 95 billion-dollar projects currently on the drawing board, Chicago Bridge & Iron is uniquely positioned to capitalize on the technological and economic changes transforming the industry.
CBI gambled heavily last year on a pricey takeover of power plant builder Shaw Group, a company of similar size. The merger, completed last month, balanced CBI’s mostly international footprint with Shaw’s largely domestic exposure, diversified the client roster to include many US utilities and gave the combined company the extra heft it craved to become an indispensable partner on many of the coming mega-projects.
Source: Chicago Bridge & Iron investor presentation
Wall Street initially jeered the lofty 72-percent premium CBI paid for Shaw, pushing CBI shares down 14 percent on the day of the announcement. But CBI managed to finance its big deal with a rather inexpensive loan, and has said the acquisition will boost earnings per share 10 percent this year. Since bottoming out in mid-November, the stock has been on a relentless climb, advancing 58 percent. At $58, it’s still a bit below the record highs notched in early 2008 but worlds away from the $5 low reached a year later, when it seemed as if no one needed any energy and nothing would ever get built again.
The Shaw acquisition carries significant risks. It expands CBI into an industry in which it lacks in-depth experience and will test its excellent project-management skills on the complicated and iffy business of building new nuclear power plants in the wake of the Fukushima accident.
CBI and Shaw had already been collaborating on the first two nuclear plants under construction in the US since the Three Mile Island disaster, with Shaw building the reactor modules and CBI responsible for the containment domes. These projects have encountered cost overruns and delays, and Shaw has taken charges on other power projects as well. But investors have become increasingly confident in recent months that CBI has a good handle on Shaw’s commitments, confidence boosted by the fact that CBI’s own big projects remain on budget and on track.
On the other hand, the acquisition doubled CBI’s workforce to 50,000, amid an infrastructure building boom that is demanding ever-rising numbers of skilled workers. It offers the chance to sell Shaw’s construction expertise to CBI clients in the petrochemical industry. And it added the predictably recurring revenue from Shaw’s plant services and environmental contracting units, lessening CBI’s reliance on lumpy construction contract awards.
In fact one Shaw shareholder, Denali Investors, lobbied aggressively against the sale last year, arguing that the takeout price was too low given the recent disposal of underperforming Shaw’s businesses and investments, increasing demand in new power plants and the ample cash on Shaw’s books, used by CBI to help finance its purchase. Denali alleged that Shaw’s chairman and CEO rushed the sale through without the usual open bid solicitation to further his political ambitions. But shareholders of both companies approved the deal, even if the subsequent performance of CBI’s shares has lent some credence to Denali’s arguments on valuation.
What’s indisputable is that the old CBI entered the merger with plenty of business momentum. Revenue rose 21 percent last year and earnings per share jumped 20 percent, both in excess of expectations. The contract backlog swelled 21 percent as well thanks to a strong $7.3 billion of new business. That included $2.9 billion in the most recent quarter for storage tanks and spheres in Saudi Arabia and Ecuador, a carbon dioxide removal plant for Exxon Australia, offshore marine work in the North Sea, petrochemical technology in Singapore, South Korea and the US, and so on.
Source: Chicago Bridge & Iron investor presentation
CBI is projecting another 19 percent sales increase this year on a standalone basis excluding the Shaw’s acquisition. On the same basis, the midpoint of the earnings per share guidance assumes a 14 percent increase in 2013. It will present guidance for the merged company at Thursday’s investor day. Earlier this week, out-of-the-money May call options on CBI shares were selling briskly.
Shaw’s has attractive niche businesses such as its pipe-making business, a natural fit with CBI’s storage expertise. And its government environmental contracting business, potentially including a lucrative contract at a plant that will convert weapons-grade plutonium into reactor fuel, contributed nearly as much revenue before the merger as the power plant building unit.
CBI has a record of capitalizing on canny acquisitions. In 2007, it paid $950 million to ABB for Lummus, a supplier of process technology and catalysts to the petrochemical industry. That unit’s revenue soared 35 percent this year amid high demand for its refining catalysts and a proprietary process for synthesizing a key rubber ingredient. And Lummus had a 26 percent profit margin, accounting for nearly 30 percent of CBI’s income.
Meanwhile, CBI’s expertise in liquified gas storage places it on the leading edge of a rapidly growing transcontinental trade in this increasingly attractive fuel. It’s conducting the preliminary engineering surveys for the conversion of LNG import terminals in Freeport, Texas and off the coast of Maryland into export facilities. But these aren’t as big as some of the pending LNG construction projects for which CBI is competing. Contracts are due to be awarded this year for for a $30 billion LNG export terminal to ship Australian natural gas to east Asia, and another such facility near a huge gas field on the Arctic coast of Russian Siberia.
Rapid advances in drilling and transportation technologies mean that the locations of energy sources and the methods for converting them to power are changing faster than ever, stoking huge demand for new energy infrastructure. The newly enlarged CBI stands out as a major beneficiary. We’re adding it to our Growth Portfolio. Buy CBI shares below $70.
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