CBI – Chicago Bridge & Iron
CBI released 2nd quarter earnings on July 30th with a beating of estimates by one cent on EPS ($1.04) which has been the norm for recent years and revenue of $2.9 billion. This represented a gain of more than double of 2012 2nd quarter revenue with additional revenue being attributable to $450 million coming from growth of the business segments including ECM (Engineering, Construction and Maintenance), Fabrication Services and Technology & Government Solutions combined and the remaining $1.1 billion attained from acquisitions. On top of growth, all three segments of business represented strong activity in the larger projects and an inflated back log from the beginning of the year.
Although gross and net income have risen, there has been a strong contraction in margin levels due to the comparatively lower margins of the acquired business (The Shaw Group) which was discussed and acquired in Q1 and also from changes in revenue mix of different their 3 different business units. SG&A expenses have had an increase of almost near double but mainly due to the recent acquisition in which they have synergy savings greater than previously estimated and down almost a full percentage point of total revenue compared to Q2 2012. Ending income from operations was 195.4 million having a 6.9% margin compared to a margin of 8.1% in Q2 2012 which is due to the same reasons as gross margin reduction. Although there was a reduction in bottom line margin, the negative impact of the acquisition and revenue mix was subsided partly to show a lower decrease YoY compared to gross margins changes.
Engineering, Construction and Maintenance has shown to benefit greatly from synergy of all divisions of the ECM group on big projects and this has been established as CBI’s main point of direction for the group to achieve growth and efficiency throughout. 70% of this division’s revenue has been deemed by the Oil & Gas business units this quarter, an increase from 63% which is evidence to the change in revenue mix affecting margins. CBI has seen new awards and growth from new projects and additional work from the ongoing ones and deems this group “continuing to be healthy”. LNG has also played a big factor in this where the Department of Energy has continued to issue licensing for the export of LNG which will give the opportunity to CBI to convert existing import terminals of LNG into export terminals and create opportunities for more project and backlog growth through this pipeline. The major projects that make up the rest of this division were all moving at full force with some even ahead of schedule other than the one Gorgon project which is a joint venture with Kentz dealing with LNG where some contracting issues have delayed the project slightly but seem to not be an issue going forward with no materialization being seen as a threat.
Government Solutions has shown a strong quarter with a book-to-burn ratio of 1.1 which puts an abrupt turnaround to the short term negative sentiment of sequestration. This has to be taken hesitantly as operating income has seen improvement but at the lower end of forecasts. There are 3 main factors impeding operating income which are new awards, overhead and performance on projects. Overhead has been seen as being excessive relative to the size of the group and guidance has displayed a possible reduction in funding in 2014 compared 2013 levels. This division is normally seeing projects small in caliber but of high quantities which a $150 million environment project in western United States initiated this quarter, will be a great addition in feeding the back half of the year with backlog and work. As far as the Technology division goes, nothing that impedes guidance for the year and projects and development seem on course for pushing CBI’s growth prospects and objectives.
Fabrication Services has remained a strong component for CBI and has had great diversification in market exposure in both domestic and international scope. In which markets are seeing a strengthening in shale gas, petrochemical and LNG developments and CBI has a good mix of backlog throughout, LNG, Nuclear, Gas Processing and petrochemical end markets. This is the one division that has assisted in margin expansion with 95% of contracts consisting of higher-margin and fixed price characteristics.
Overall, CBI has the market penetration and diversification to keep the company moving forward with growth. As with almost all acquisitions, short term effects will inhibit the financials from expansion in hopes of long term synergies and expansion. I see the different branches of CBI bringing a good product group moving forward as seen before and the acquisition of The Shaw Group being a great addition to the team. With the diversified products provided by CBI, the demand for LNG does not seem to be slowing down globally and I feel this will be a key driver on the supply side for business with demand driving the supply side for more quantities. As CBI penetrates this market in many directions, I feel it will be a driver for CBI and the energy market will be pushing growth as they have a great umbrella into all different aspects and will be able to divert around volatility in the commodity markets as a whole. I view CBI has a strong company in the industrial sector and one that will be a great addition as we repopulate our portfolio in the beginning of the academic year. However only part of our investment thesis holds true and needs to be updated accordingly regarding back log levels and the prices of certain commodities for current timing before we can see this as a definite buy going into the semester. So I iterate this position as a HOLD until the updating of the investment thesis.