Should you follow these analysts and buy Chicago Bridge and Iron

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Mar 18, 2015
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Recent correction in oil prices have taken a toll on Chicago Bridge & Iron Company's (CBI, Financial) share prices and the stock has corrected ~50% from 2014 highs. However, according to many analysts, this correction provides a good opportunity to buy the stock. In his recent report, Jefferies analyst Luke Folta reiterated his buy opinion on the company. He considers the stock a bargain at current levels and has a price target of $75 on the stock. He believes divesture of assets and restructuring could generate more that $100 million in cash flow for the company in 2015 and 2016 which could be used towards stock buy backs.

Another analyst, John B. Rogers of D.A. Davidson, is also bullish on the stock and has a $70 price target. He believes that with sustained earnings and cash flow, let alone growth, the stock can appreciate substaintially from the current level. He is optimistic on the company's backlog growth due to “LNG export facilities, new gas fired power plants, and other energy/downstream infrastructure that could be awarded in 2015.”

Even analysts who are bearish on Engineering and Construction sector as a whole are positive on Chicago Brigde & Iron as the expectations are too low. Vishal Shah of Deutsche Bank AG DB Gold Double Long EÂ (DGP, Financial) , who recently downgraded two names in the space - Fluor Corp (FLR, Financial) and KBR Inc (KBR, Financial) – to hold, maintained his buy ratings on Chicago Bridge and Iron citing that its result could benefit from an acceleration in gas-fired power plant projects this year.

The company recently reported strong fourth quarter results. CB&I adjusted net income, which was $161.3 million, or $1.47 per diluted share, excluding acquisition and integration related costs. Revenue for the fourth quarter was $3.4 billion with new awards of $3.3 billion. The company has an impressive track record of growth. The company's diluted EPS has increased from $3.07 in FY2011 to $4.98 in FY2014. In the same period, its revenues have more than doubled to $12.97 bn aided by the Shaw acquisition. According to sell side estimates, the company's topline and adjusted EPS are expected to grow 10% and 8%, respectively in the current fiscal.

Chicago Bridge and Iron's business is a long lead time one with high visibility. The company received $3.3 billion in new awards for the fourth quarter, and its order book stood at $30.4 billion at the end of FY2014. 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.

Chicago Bridge & Iron is trading at eight times FY2015 consensus EPS estimates. Last quarter, billionaire hedge fund manager David Einhorn (Trades, Portfolio) initiated a long position in its stock buying 2.94 mn shares. Other big name investors who bought the company's shares included Francis Chou (Trades, Portfolio), Arnold Van Den Berg (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), Richard Snow (Trades, Portfolio), Jeremy Grantham (Trades, Portfolio), Jim Simons (Trades, Portfolio) and David Dreman (Trades, Portfolio). Out of 21 analysts covering the company, eleven are positive and have buy recommendations, six have hold ratings and four have sell ratings. Given the company’s low valuations, I recommended buying the stock.