In a bid to arrest its widening trade deficit and support natural gas pricing, the United States Department of Energy (DOE) recently relaxed its norms for LNG exports. It has authorized Freeport’s LNG terminal to export up to 1.4 bcf of natural gas/day for the next 20 years, to countries like India that do not have free trade agreements. But Freeport’s LNG export terminal has to be expanded before it can process such large shipments. This presents a bullish case for Chicago Bridge & Iron Company N.V. (NYSE:CBI).
Why CB&I
Chicago Bridge & Iron Company N.V. (NYSE:CBI) is one of the leading energy-focused engineering and construction companies on the globe. It has been in business since 1889, and specializes in LNG exports along with petrochemical and natural resources industries.
It is due to its solid reputation that the expansion project (FEED contract) of the Freeport liquefaction plant has been jointly awarded to Chicago Bridge and Zachry Industrial. The overall project cost is estimated to be around $10 billion, and analysts at BB&T believe that Chicago Bridge & Iron Company N.V. (NYSE:CBI) could rake in between $3-$4 billion in revenues from it.
Since its order backlog currently stands at $25.5 billion, a project addition of this magnitude should fatten its order book by 1%2-16%, which will eventually add $126-$168 million to its annual net earnings (estimated). This is one of the reasons why the Street is bullish on the company.
A Strategic Acquisition
Another catalyst for Chicago Bridge & Iron Company N.V. (NYSE:CBI) is its recent acquisition of Shaw Group for $3 billion. It is a leading engineering and construction company based in Canada, which has added another vertical in Chicago Bridge’s portfolio. Apart from opening up new markets, the acquisition has diversified its business and added stability to its revenues.
Furthermore, its order backlog of $10.9 billion in Q1 FY12 ballooned to $25.5 billion Q1 FY13 (post acquisition). But there has been an industry-wide stagnation of new orders. Fluor Corporation (NEW) (NYSE:FLR)’s order backlog of $42.5 billion in Q1 FY12 shrank to $37.5 billion in Q1 FY13. Even KBR, Inc. (NYSE:KBR)’s order backlog of $14.2 billion in Q1 FY13 shrank by $716 million YoY.
Hence Chicago Bridge & Iron Company N.V. (NYSE:CBI)’s inorganic expansion and order book expansion, will most likely allow it to grow faster than its peers. This is corroborated by their respective EPS growth estimates.
| Company | Forward P/E | PEG | Net Margin | EPS growth next 5yr |
|---|---|---|---|---|
| Fluor Corporation | 12.85x | 1.76x | 1.6% | 12.16% |
| KBR | 10.29x | 2.89x | 1.8% | 12% |
| Chicago Bridge | 11.67x | 0.98x | 4.2% | 21.63% |
Numbers game
From the table above it’s evident that shares of Chicago Bridge & Iron Company N.V. (NYSE:CBI) are deeply undervalued, despite its recent rally. Furthermore its net profit margins are the highest amongst its mentioned peers, which eventually yields a high ROE ratio of 18.9%.
Additionally, management expects its margins to further improve in 2013, as 85% of its order backlog includes high margin projects But that seems to be an industry-wide advantage, as both Fluor Corporation (NEW) (NYSE:FLR) and KBR, Inc. (NYSE:KBR) have been recording margin expansions lately.
