Infrastructure needs could fuel Chicago Bridge growth
The United States has one of the most advanced energy systems in the world, and the related infrastructure for transmission, storage and distribution is massive.
This country has about 2.6 million miles of pipelines, 414 natural gas storage facilities, 330 ports and more than 140,000 miles of railways that handle petroleum, liquid natural gas and coal products, according to the Quadrennial Energy Review published in April by the federal government. Also, it has 642,000 miles of high-voltage, electrical transmission lines and 6.3 million miles of distribution lines.
And much of that data is dated, the report said.
“There’s a major need for a lot of rebuilding infrastructure,” said William Warnke, principal and portfolio manager at Warnke/Nichols Ltd. in Hales Corners. For example, Warnke said, the nation has a strong demand for upgrading power generation projects, as do many other areas of the world.
Warnke, a value style investor, pointed to a company that does those kinds of projects, even though its stock is trading well below its 52-week high. Chicago Bridge & Iron Company N.V. (CBI) of The Hague, Netherlands, provides engineering and construction services worldwide, particularly for electric power and energy-related projects.
The company generates nearly $13 billion of annual revenue and has a $30 billion backlog, Warnke said. It is trading at a “very attractive” multiple of about nine times earnings, and the company and insiders have been buying stock, he added.
“If you look at their returns on capital — that’s usually the way we judge whether management has done a good job— their return on equity has been hovering in the above-average 20% area for many years,” Warnke said.
The company does about half its business in the United States and believes it can grow more in this country and internationally, Warnke said. It does not generate a smooth stream of revenue, but he pointed out the observation of legendary investor Warren Buffett — also an owner of this stock — who said he prefers a lumpy higher return to a smooth lower return.
Chicago Bridge & Iron’s stock price fell to nearly $32 per share in January from almost $90 per share in early 2014, partly because of a market perception that it would be negatively impacted by falling oil prices, Warnke said. However, only about 5% of the company’s revenue is exposed to so-called upstream markets such as exploration and drilling that are hurt by price declines, he said.
“There was a misperception for a while, but the market is finally starting to realize that’s really not a big issue,” Warnke said.
The other negative affecting the stock price involves a Georgia Power nuclear plant project with significant cost overruns. The power company blamed the overruns on Chicago Bridge & Iron and another contractor, but CBI said some of its subcontractors will be liable for reimbursing the additional costs, Warnke said.
The company has a lot of fixed-rate contracts, which typically have higher profit margins. However, the downside to them is that they can be money-losers when there are cost overruns, as in the Georgia Power situation, Warnke said.
The biggest risk here is that Chicago Bridge & Iron could encounter more cost overruns with other fixed-rate contracts, he said.
Chicago Bridge & Iron shares have a 52-week trading range of $65.38 to $32.16. They could reach as high as $80 in the next two to three years, Warnke said.