Editor’s Note: The initial article stated Shaw was based in Canada. That was incorrect, this version has been corrected.
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 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 Louisiana, which has added another vertical in Chicago Bridge & Iron Company N.V. (NYSE:CBI)’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.
The management of Fluor Corporation (NEW) (NYSE:FLR) explained that this is because the demand for energy projects is gradually picking up, which is apparently resulting in higher margins. Its margins may have improved of the short-term term, but the bottom-line remains that its gross margins have deteriorated by 31% over the last 5 years.
As of now, Fluor Corp. operates with a gross margin of 3.3%, which is expected to balloon up to 4% sometime this year. Owing to improving margins and rebounding energy industry, analysts at Deutsche bank estimate that the fair price of Fluor Corp. is $84 per share.
Meanwhile KBR, Inc. (NYSE:KBR) has recorded a 150bps margin improvement over the last year, primarily due to its cost control measures. Apart from that, its order book witnessed only a slight deterioration because KBR had a strong 2012. However, its management expects an even better 2013, which suggests that KBR’s order backlog could quickly balloon up in the coming quarters.
With improving margins and bullish guidance on order inflows, its not hard to justify why analysts Deutsche Bank have a price target of $44 per share (a 38% premium).
Final Words
I think that both KBR and Chicago Bridge & Iron Company N.V. (NYSE:CBI) offer lucrative returns, as their gross margins have improved by 70% and 51%, respectively, over the last 5 years. But the acquisition of Shaw Group, along with Freeport LNG development project, should propel Chicago Bridge’s short to medium term returns. This is why analysts at Deutsche Bank are particularly bullish on Chicago Bridge with a price target of $87 per share (a 47% premium).
The article This Stock Is Set To Skyrocket originally appeared on Fool.com and is written by Piyush Arora.
Piyush Arora has no position in any stocks mentioned. The Motley Fool owns shares of Fluor. Piyush is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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