Mr. Buffett, the CEO of Berkshire Hathaway Inc. (NYSE:BRK.A) is famous for his unique investment theses. He just loves to invest in branded consumer products, such as See’s Candy, The Coca-Cola Company (NYSE:KO), and lately Heinz ketchup and sauces. The reason he prefers branded consumer products is that they require low capital expenditure, and can therefore replicate their success exponentially. After all, there’s no need to buy jets or finance the construction of new roads to maintain the production of The Coca-Cola Company (NYSE:KO) bottles. It’s easy, and most importantly, it’s cheap. That’s why it’s worth paying close attention to times when Mr. Buffett deviates from his well known philosophy and buys into capital intensive businesses like infrastructure. In the first quarter of 2013, he did just that.
Berkshire’s infrastructure play
According to a regulatory filing at the end of March, Berkshire Hathaway Inc. (NYSE:BRK.A) owned about 6.5 million shares of Chicago Bridge & Iron Company N.V. (NYSE:CBI). The average purchase price for shares was probably somewhere in the area of $50 per share. As of now, shares are hovering around $60, valuing his total position at $390 million. Ironically, Chicago Bridge & Iron Company N.V. (NYSE:CBI) isn’t based in Chicago. And it’s been decades since it derived revenues from bridges or iron. Today, CB&I is a Netherlands-based leader in the energy infrastructure business. CB&I was founded in 1889 to design and build bridges. By the early 20th century, it had already shifted its focus to bulk liquid storage tanks and vessels that transport oil and other refined products. It has been one of the key providers of infrastructure to the energy sector for a long time. Today, it’s a big, global company that has its fingers in almost every major energy project in the world. The position in Chicago Bridge & Iron Company N.V. (NYSE:CBI) has been added to Berkshire Hathaway Inc. (NYSE:BRK.A)’s infrastructure portfolio, together with MidAmerican Energy and Burlington Santa Fe, a railroad.
A look into the future
One great thing about companies with long-tailed projects is they often disclose their project “backlog,” which is the projects that the company has won but hasn’t started working on yet (and therefore, hasn’t yet been recognized as revenue). Looking at the backlog list is kind of like getting a glimpse into the future growth of the company. If a company is growing but backlog is shrinking, that’s a red flag that growth may be ending. Conversely, if a company’s backlog is consistently growing, that’s a sure sign that earnings and revenues will also grow. Chicago Bridge & Iron Company N.V. (NYSE:CBI)’s backlog was a robust $6.9 billion at the end of 2010. A year later, the backlog had grown to $9 billion.
At the end of 2012, backlog stood at $10.9 billion. Analysts now estimate that backlog by the end of 2013 could grow to over $12 billion to $13 billion. By looking at the compounded and consistent growth in the company’s backlog, you know that it’s doing something right.
A cash machine
Berkshire Hathaway Inc. (NYSE:BRK.A) only buys into businesses with a proven track record of consistently growing earnings. And the reported earnings-per-share isn’t what Buffett refers to as earnings because these can be easily manipulated. “Real” earnings are cash earnings, or free cash flow (FCF). In that regard, Chicago Bridge & Iron Company N.V. (NYSE:CBI) is literally an ATM. In the years 2003 – 2005, the company brought home $302 million of FCF. In the years 2006-2008, FCF has grown to $655 million. Finally, in the most recent period (2009-2011), FCF stood at $836 million. I suspect that in the next three year period, FCF will cross the $1 billion threshold. Notice that between 2006 and 2008, CB&I doubled FCF over the previous three-year period. The growth continued in the most recent three-year period, with FCF increasing another 28% over the previous period. Clearly, demand for Chicago Bridge & Iron Company N.V. (NYSE:CBI)’s services is growing, and these numbers demonstrate management’s ability to execute during periods of growing demand.
The Fool looks ahead
CB&I has all it takes to be another successful Buffett stock. It gushes free cash flow, it’s highly dominant in its sector, and it has a proven future “backlog” of profits. All that’s left for you to do is to come and pick it up.
Shmulik Karpf has no position in any stocks mentioned. The Motley Fool recommends Berkshire Hathaway. The Motley Fool owns shares of Berkshire Hathaway. Shmulik is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article When Buffett Speaks – We Listen originally appeared on Fool.com is written by Shmulik Karpf.
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