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Despite the Energy Carnage, Now Is the Time to Buy Chicago Bridge & Iron

By Luke Neely – Feb 10, 2016 at 5:00AM

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CBI may have been unfairly lumped into the broad-based energy selling.

Chicago Bridge & Iron (CBI) was founded in 1889 and brings more than 125 years of experience in its industry. The company has built itself into a large multinational conglomerate in engineering, procurement, and construction, with a specialization in energy infrastructure. Recently, we've seen anything energy related get shellacked in the commodity-price meltdown, and CB&I is no exception.

Because of the selling pressure, shares are more than 50% off their highs in early 2014. But CBI may be getting unjustly compared with the rest of the sector, and the company continues to see increases in revenue and cash flow on the back of a commodity meltdown.

Let's examine, then, four reasons why now may be the time to buy CB&I.

1. It's a leader in energy infrastructure services
The business operates through four segments: Engineering & Construction, Fabrication Services, Technology, and Capital Services. The engineering and construction side of the company generates 4% to 7% operating margins and accounts for 69% of the revenue. Fabrication services, meanwhile, produce 10% to 13% operating margins and account for 19% of revenue. The Technology and Capital Services segments represent the remaining 12% of revenues.

Source: CB&I company presentation.

Its vertical integration across the entire supply chain offers customers incredible value. The ability to leverage strategic partnerships with vertical integration and supply chain expertise gives it substantial scale advantages over its competitors. 

Source: CB&I company presentation.

2. Substantial backlog and long-term contracts provide predictability
CB&I's current backlog generally consists of cost-reimbursable deals and sits at around $30 billion. That means CB&I performs its services and receives a fixed hourly rate, a fixed fee, or a percentage of reimbursable costs. Fixed-price contracts are normally shorter in duration and have certain schedules that must be met. They also provide for increased predictability. Fixed-cost (or hybrid) contracts make up two-thirds of the backlog.

Source: CB&I company presentation.

Continued growth in the backlog, as well as the recent acquisition of Shaw Group, has helped drive growth over the past few years. As Philip Asherman, CB&I's president and CEO, said in the most recent quarterly call:

CB&I's performance remains solid. Our new awards continue to emphasize the benefit of our strong competitive positioning, integrated delivery platform, selectivity, and healthy underpinning. We are confident in our ability to convert major prospects into new backlog in the fourth quarter of 2015 and in 2016, while sustaining robust margins and maximizing operating cash flow performance.

3. Trends in energy position the company well
Despite the downturn in energy prices, the population is growing and will need to consume more energy. This secular trend positions CB&I well through its servicing of onshore and offshore projects (upstream activities), processing, refining, and LNG (downstream activities), and petro- and nuclear-based power generation. In short, there's a high probability that companies and countries will continue to invest in power and other energy facilities, such as  generation, storage, and pipelines. 

Source: CB&I company presentation.

The Energy Information Administration, for example, has issued a projection showing the U.S. as becoming a net exporter of natural gas by 2017. There needs to be a massive buildout of terminals for that to happen, and as a leader in the category, CB&I is uniquely positioned to help get U.S.-based natural gas to the global market.

4. There's a shareholder-friendly and competent management team
Management has done an incredible job of procuring long-term contracts. Also, SG&A has declined steadily over the years, proving that management keeps a close eye on costs. Moreover, CB&I has consistently generated better operating margins than those of peers KBR (KBR 0.71%), Jacobs Engineering Group (J 0.59%), and Fluor (FLR -0.68%). The industry-best margins show just how strong the management team and the business are in their industry. 

Source: CB&I company presentation.

A big part of management's capital allocation strategy, meanwhile, has been the return of capital to shareholders in the form of repurchases and dividends. And that's not to mention a focus on reinvestment in the company's higher-return-on-investment segments -- technology and fabrication. 

Source: CB&I company presentation.

Investor takeaway
The company continues to see increases in revenue and cash flow on the back of a commodity meltdown -- don't forget the impressive backlog. Its ability to operate in this environment is impressive, given the performance of commodity prices. Again, it shows the company's underlying strength. 

Source: GuruFocus.

It's not every day you find businesses with great moats like CB&I trading at an extremely attractive valuation. Its industry-leading margins and massive long-term backlog will give it a unique opportunity in the energy sector for years to come. Shares are off more than 50% from their recent highs amid unjustified pessimism. CBI looks attractive at current levels with a P/FCF of 12.07, especially for Foolish investors with the ability to look past current business weakness.

Luke Neely has no position in any stocks mentioned. The Motley Fool owns shares of Fluor. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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