Hedge fund titan David Einhorn (Trades, Portfolio) has recently initiated a long position Chicago Bridge and Iron (CBI, Financial). His fund now holds 2,940,000 shares of the company. The company has an impressive track record of growth and its EPS has more than doubled over the last few years.
Table 1: Chicago Bridge and Iron's key financials
Source: Gurufocus Value Screens
Chicago Bridge and Iron's stock price has declined by more than 50% over the last few months. The biggest culprit was the decline in oil prices. Investors were also worried about geopolitical factors like the Russian sanctions which may affect the company's technology sales.
Chart 1: Chicago Bridge and Iron's stock price movement over the last one year
Source: Google finance
While investor concerns surrounding these headwinds are valid, the extent of correction seems a bit excessive to me. The company is now trading at 6.86 times FY2015 consensus EPS which implies that investors are pricing in a rapid decline in the company's earnings going forward. I believe investors are misunderstanding the company's fundamentals. The company's earnings are unlikely to decline meaningfully in the near term given its strong order book. Further, the company's exposure to gas-fired power plant projects should partially offset any decline in oil-related work.
Chicago Bridge and Iron's business is a long lead time one with high visibility. The company's order book at the end of the third quarter stood at $30.7 billion up more than 10% year over year. The company received $3 billion in new awards for the third quarter compared to $2.5 billion during the same period prior year. New awards totaled $13 billion for the first three quarter of 2014. The company's healthy order book and award wins provide a good visibility into the company's near to medium term revenues which should reassure investors.
Chicago Bridge and Iron should also benefit from an acceleration in gas-fired power plants projects in 2015. Markets in the United States are showing acceleration in the pace of gas-fired projects to replace coal plant retirements. Chicago Bridge and Iron has been focusing on this market for quite some time. Recently, the company signed a significant strategic agreement for NET Power – CB&I's collaboration with Exelon, Toshiba and 8 Rivers Capital. As a part of this agreement, CB&I will be an exclusive partner and contribute the expertise to engineer, procure, construct, commission and test a 50-megawatt natural gas-fired electricity generating demonstration plant. This will be a first-of-a-kind demonstration plant to validate a new natural gas power system that produces zero atmospheric emissions. If successful, it represents a potential game-changing opportunity to comply with clean energy regulations.
Sell side analysts are expecting the company's EPS to increase in FY2015 albeit at a slower pace. The company is trading at 6.86 times FY2015 consensus EPS estimates. I believe the recent correction provides a good entry point for investors who want to invest in high quality engineering company at a reasonable price.
