The DRiP Investing Resource Center
Your Location For Dividend Reinvesting Information

CBI: Better Than Erector Sets or Lego Blocks

George C. Fisher

Chicago Bridge and Iron Company (CBI $22) is a global engineering and construction firm which designs, builds, and repairs bulk liquid terminals, liquefied natural gas terminals, steel tanks, refinery pressure vessels, low temperature cryogenic storage facilities, and other steel structures. According to the company, it has been continuously engaged in the engineering and construction industry since 1889 and, based on its knowledge of and experience in this field, the company believes it is the leading provider of erected steel tanks and related services in North America and one of the leading companies in this specialized field worldwide. CBI primarily serves customers in the petroleum, petrochemical, chemical, electric and gas utilities, pulp and paper and metal and mining industries.

Currently headquartered in The Netherlands, CBI has offices and operates in North America, Asia, South America, Europe, South Africa , Australia and the Middle East. During the 1990s, CBI was diversified in both construction and chemical manufacturing. In 1996, Praxair Inc, a large US chemical manufacturing firm, purchased the company. During a subsequent restructuring, Praxair retained selected assets and, in early 1997, spun off the European-based engineering and construction division as a public company.

Chicago Bridge and Iron’s IPO in March of ‘97 was priced at $17 a share ($4.25 split adjusted price based on two subsequent stock splits - 2:1 in 2003 and 2:1 in March, 2005). As a large portion of its business is energy related, the stock took a hit in the 1998 drop in oil prices, and traded to a low of $8 a share ($2 split adjusted). Since then, CBI’s shares have mirrored the stellar rise in the commodity price of oil, splitting twice and traded up as high as $25 last April (split adjusted, or $100 per original IPO share). The company is not based in Chicago, Illinois, as its name might implicate, and its stock is an ADR trading on the New York Stock Exchange.

During 2004, the company worked on more than 700 contracts for customers in a variety of industries. CBI is very experienced in international construction projects, as exemplified by 39 percent of 2004 revenues were generated outside North America.

Annual revenues have grown from $750 million in 1998 to $1.9 billion last year. More importantly, as of the end of 2004, CBI had a growing backlog of projects, in excess of $2.3 billion, under contract. New business taken in 2004 also jumped to $2.6 billion. When reviewing project-oriented businesses, these figures are important indicators of future revenue and income trends. New business taken reflects additional contracts received during the year; backlog reflects work in progress and uncompleted projects not billed; revenue reflects projects completed or scheduled billings. Management has generated an impressive four year record of growth in these areas, as shown in the table below:

 

2004

2003

2002

2001

New Business Taken

$2.6 bil

$1.7 bil

$1.6 bil

$1.1 bil

Backlog

$2.3 bil

$1.5 bil

$1.3 bil

$0.8 bil

Revenues

$1.9 bil

$1.6 bil

$1.1 bil

$1.0 bil

Operating Income

$102 mil

$103 mil

$77 mil

$54 mil

Operating Cash Flow

$132 mil

$90 mil

$72 mil

$105 mil

Earnings Per Share
(split adjusted)

$0.67

$0.69

$0.56

$0.22

Interestingly, operating income for 2004 would have been higher by an additional $50 million, but the company wrote off losses on two projects, in Saudi Arabia and North America. While this one time charge substantially impacted 2004 income and earnings performance, operating cash flow growth remained strong. Per share earnings comparisons for 2005 over 2004 should be notable, but I believe this is already priced into the stock.

According to the recently released CBI’s 2004 Annual report, management is expecting a minor slowdown in new business taken in 2005 to the $2.2 bil to $2.4 bil range. This may reflect in lower 2006 and 2007 revenue and income growth.

As the demand for oil and natural gas increases, so does the need to improve, upgrade, and expand the infrastructure to physically deliver the products. If the demand for oil and gas tapers off due to a high-energy-price induced recession and an increased usage of alternative fuels, so will the need to expand the infrastructure. However, if demand stabilizes, or continues to grow, so should infrastructure capital expenditures. Infrastructure budgets are as cyclical as the price of oil and gas, and all three are currently very strong. CBI is well positioned to capitalize on the current international focus of additional LNG capacity. Over half of new business taken in 2004, representing $1.3 billion in projects, was LNG related.

CBI has been getting important media attention as it has landed a few headline-making contracts. Last year, CBI announced a single contract valued at $700 million to design and build additional LNG terminal capacity in the U.K. Some investors are being attracted to CBI as a shorter-term recipient of the current LNG boom in terminal construction and operation. On page one of the 2004 Annual Report, management acknowledges the “near-term opportunities … of LNG, refining clean fuels, oil, and gas processing.” (I found the 2004 Annual report to be interesting reading, and it is available online at the company website - www.chicago-bridge.com, investor’s relations section.)

While Chicago Bridge and Iron has garnished higher interest recently due to its positioning in LNG construction, CBI is diversified well past these headline projects. Investors who are focused only on the LNG opportunities are overlooking the strong positioning of CBI in other heavy industrial-oriented construction markets. Narrowly focused as an engineering, procurement, construction, and repair/maintenance company, CBI thrives on both capital expenditure and operational budgets for some of the largest industrial firms in the world.

CBI’s flat bottom storage tanks are used primarily in the petroleum, petrochemical and chemical businesses and can be used for storage of crude oil, refined products, water, chemicals and a large variety of feedstocks for manufacturing industries. Specialty and other structures include mining and metals, utilities, telecommunications, aerospace and wastewater treatment applications. Examples of these include vacuum testing tanks for satellites before launch, hydroelectric power facilities, and processing facilities for mining companies. Low temp / cryogenic tanks are used in the storage and handling of LNG and many other chemicals requiring temps as low as -432 degrees F to maintain a liquid form. CBI’s repairs and turnarounds services offer customers logically planned shutdowns of complete refinery or chemical processing plants for repair and maintenance. Elevated tanks are mainly single pedestal water tanks, like those seen as a mainstay to the rural landscape of America , announcing to all the name of the local town.

CBI’s peers include giants like Fluor (FLR) and ABB (ABB). Nevertheless, the company has been steadily increasing revenues and profits. Currently trading at 19 times estimated 2006 earnings per share of $1.14 a share, and a Price to Sales ratio of 1.1, CBI’s current share price seem to be fairly valued. Over the past five years, earnings growth has averaged 25 percent, but maintaining that pace going forward may prove to be challenging. With a potential slowdown of capital expenditures in the LNG construction market sometime in the future, CBI’s project diversity may provide an interesting cushion. The company has virtually no long term debt and has a relatively small float of 96 million shares. 2004 cash flow from operations was over $132 million, up from $50 million in 1998. Return on capital has been consistently above industry average at a respectable 13.7%.

CBI has been a topic in both my books and in my commentary for many years. I discovered CBI in late 1997 and began buying its stock in early 1998. I own CBI in their DRIP program and in broker accounts. For most of 1999 and 2000, I enrolled in their automatic withdrawal from my checking account program, and religiously invested $125 a month at a usury $5 transaction fee. Over the past seven years, I have been impressed by management and the company’s diverse product offerings. CBI has become a core holding in my personal portfolio accounts, representing the energy and heavy construction economic sectors. CBI was added to the Canadian MoneySaver Overlooked Stock Portfolio in Jan 2005.

I like smaller companies that have been in business for over 100 years. There should a certain amount of envy within a community for firms that have a record of respectable corporate lives; rewarding clients with quality work, employees with growing opportunities, and shareholders with above average returns. CBI has an interesting history and is firmly entrenched in its niche markets. Current management has proven their ability to generate profit growth across its product line. While I doubt the fivefold rise in stock price since 1998 will be duplicated in the near future, CBI should continue to amply reward long term investors.

George C. Fisher is a 30-year veteran in DSP/DRIP investing. He is author of All About DRIPs and DSPs (McGraw Hill, 2001) and The StreetSmart Guide to Overlooked Stocks (McGraw Hill, 2002). Mr. Fisher is an avid dividend reinvestment advocate and utilizes the strategy with all dividend paying stocks, both at the broker and direct with the companies using their DRIP programs.