Contrary to Popular Belief, Oil Won’t Weigh This Company Down

This week’s hot stock was recently upgraded after filing its 2014 10-K. The company now receives our Very Attractive rating in part due to its strong fundamentals, but also because of its cheap valuation. After opening shop over 100 years ago, this company has developed a long history of providing engineering, fabrication, construction, and maintenance services worldwide — and doing so profitably. After an abysmal 2014 for CBI’s stock price, which fell over 44%, the company’s annual report revealed that this price movement was extremely overblown and the company actually had a great year. This week’s hot stock is industrial company Chicago Bridge & Iron Co. (CBI).

Chicago Bridge & Iron had many analysts questioning its accounting practices as well as its dependence on oil prices. Despite the noise, Chicago Bridge grew after tax profit (NOPAT) by 24% year over year in 2014, which continues a long-term trend in which the company has grown NOPAT by 24% compounded annually since 2008. Chicago Bridge currently has a 15% return on invested capital (ROIC) which ranks in the top quintile of all companies we cover. Chicago Bridge also captured numerous new contracts in 2014 to supply parts, maintenance to energy plants going forward. As a result, revenues increased 16% in 2014. Much of the stock price decline in the second half of 2014 coincided with the oil price decline as investors featured the company’s customers in the oil rig construction business would jump ship. The company’s CEO looked to quell these fears, noting that less than 5% of business is tied to upstream oil markets. It appears the market may be overreacting to the company’s small hand in oil operations.

Because of the unwarranted fears noted above, CBI is currently deeply undervalued. At its current price of ~$46/share, Chicago Bridge has a price to economic book value (PEBV) ratio of 0.8. This ratio implies that the market expects Chicago Board’s NOPAT to decline 20% from current levels. Given over five years of double digit annual NOPAT growth, this seems highly unlikely.

If Chicago Bridge & Iron can grow NOPAT by just 5% compounded annually for the next seven years, the stock is worth $74/share –– a 61% upside. If Chicago Bridge can continue growing NOPAT anywhere near the past five years the upside will be even more impressive. Follow the fundamentals, not the market fears.

Disclosure: David Trainer and Kyle Guske II receive no compensation to write about any specific stock, style, or theme.

Photo Credit: Bjoern Schwarz

    2 replies to "Profit From Unwarranted Oil Price Fears With This Stock"

    • william brown

      my concern on this idea has been the open ended utility construction delay liability that is only recently been p[riced into the stock when it fell into low 30’s where i bought the idea after waiting 3 months to execute at that price

    • Andre Rouillard

      We’re also aware of this liability. We’re looking into it a little further at the moment, and have read Prescience Point’s report on the accounting issues, but the liability was materially reduced in the company’s most recent filing. Cost overruns are common with construction companies and we think that some of the concerns in Prescience’s report were overblown.

      Thanks for reading and commenting.

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