One of the cheapest stocks in our Large Cap 1000 Screener, which you can access for free unlimited here, is Chicago Bridge & Iron Company N.V. (NYSE:CBI).
Chicago Bridge provides a wide range of services through its four operating groups, including conceptual design, technology, engineering, procurement, fabrication, modularization, construction, commissioning, maintenance, program management and environmental services to customers in the energy infrastructure market throughout the world, and are a provider of diversified government services.
A quick look at Chicago Bridge’s share price history (below) over the past twelve months shows that the company’s share price is down 21.46% from $39.11 on December 7, 2015 to $32.10 today.
(Source: Google Finance)
Back in October, Chicago Bridge released its Q3 2016 financial results which included:
Net income of $121.8 million, or $1.20 per diluted share, for the third quarter of 2016, as compared to a net loss of $740.4 million, or $7.02 per diluted share, for the third quarter of 2015. On an adjusted basis, net income for the third quarter of 2015 was $135.9 million, or $1.28 per diluted share.
Third quarter 2016 revenue was $2.8 billion, as compared to $3.3 billion in the third quarter of 2015, or $2.8 billion on an adjusted basis.
Net cash provided by operating activities totaled $176 million in the period, for a total of $495 million year-to-date.
New awards for the third quarter were $2.7 billion, as compared to $4.0 billion for the third quarter of 2015, or $3.9 billion on an adjusted basis. The company’s backlog at the end of the third quarter of 2016 was $20 billion.
Philip Asherman, Chicago Bridge’s President and Chief Executive Officer had this to say about the results:
“Our results for the third quarter were strong, despite the headwinds of the market and movement on the timing of several new awards. New awards, revenues, operating income and margins, and earnings per share all reached their highest points year-to-date. We continue to be optimistic with a very active prospect list that we expect to see awarded in the fourth quarter and into 2017.”
Solid Margins
Despite the drop in its share price the company has had a good year to date.
As you can see from the chart below, revenue was $2.8 billion for the third quarter 2016, representing a decrease of $545.5 million (16.4%) compared with the corresponding 2015 period, however, the company’s third quarter and year-to-date 2015 revenue included approximately $502.9 million and $1.6 billion, respectively, of revenue attributable to its former Nuclear Operations.
What’s also noticeable is that despite the drop in revenue from Q4 2015, Chicago Bridge has maintained healthy gross margins around 11% and operating margins around 8%. Net income has also been improving, up 286% to $121.8 million from negative ($65.8 million) in Q4 2015.
| Amounts in thousands | ||||
| Quarter: | 3rd | 2nd | 1st | 4th |
| Quarter Ending: | 9/30/2016 | 6/30/2016 | 3/31/2016 | 12/31/2015 |
| Total Revenue | $2,776,177 | $2,695,615 | $2,667,733 | $3,274,964 |
| Gross Profit | $326,568 | $294,526 | $287,605 | $381,305 |
| Operating Income | $233,522 | $202,133 | $187,940 | -$66,060 |
| Net Income | $121,760 | $123,839 | $106,925 | -$65,725 |
New Awards/Backlog
New awards represent the expected revenue value of new contract commitments received during a given period, as well as scope growth on existing commitments. Backlog represents the unearned value of new awards. New awards and backlog include the entire award values for joint ventures that the company consolidates and our proportionate share of award values for joint ventures that are proportionately consolidated.
New awards were $2.7 billion for the third quarter 2016 (including approximately $17.0 million related to equity method joint ventures), compared with $4.0 billion for the corresponding 2015 period. Significant new awards for the third quarter 2016 included a gas turbine power project in the U.S. (approximately $600.0 million); a refinery project in Russia (approximately $460.0 million); and federal funding allocations for the company’s mixed oxide fuel fabrication facility project in the U.S.
Backlog at September 30, 2016 was approximately $19.8 billion (including approximately $1.8 billion related to the company’s equity method joint ventures), compared with $22.6 billion at December 31, 2015 (including approximately $1.8 billion related to equity method joint ventures), with the decrease reflecting the impact of revenue exceeding new awards by $2.5 billion and other adjustments, primarily related to reductions in maintenance backlog for its Capital Services operating group.
Solid Balance Sheet
A quick look at the company’s balance sheet shows the company has plenty of cash and cash equivalents totaling $615 million, and total debt of $2.4 billion, or a cash to debt ratio of 0.26. Chicago Bridge has been slowly paying down its debt, with total debt down 20% since Q4 2015.
While this may still seem like a lot of debt compared to its cash and cash equivalents, it’s important to have a look at the company’s statement of cash flows to see where the real value lies.
| Amounts in thousands | ||||
| Quarter: | 3rd | 2nd | 1st | 4th |
| Quarter Ending: | 9/30/2016 | 6/30/2016 | 3/31/2016 | 12/31/2015 |
| Cash and Cash Equivalents | $614,966 | $602,912 | $641,485 | $550,221 |
| S/T Debt / Current Portion of L/T Debt | $941,686 | $863,270 | $980,671 | $803,000 |
| Long-Term Debt | $1,456,114 | $1,474,498 | $1,492,365 | $1,800,000 |
Loads of Free Cashflow
Here’s where I see the real value in Chicago Bridge. A quick look at the statement of cashflows (below) shows the company has $612 million in net operating cash flow (TTM). When you compare that to the company’s capex of just $62.8 million that means Chicago Bridge has generated $549 million in free cash flow (TTM).
What’s even better is that the company has spent $212 million repurchasing shares at a discounted price, paid down debt of $255 million and paid dividends of $108 million. All of which is great news for existing shareholders.
| Amounts in thousands | ||||
| Quarter: | 3rd | 2nd | 1st | 4th |
| Quarter Ending: | 9/30/2016 | 6/30/2016 | 3/31/2016 | 12/31/2015 |
| Net Income | $121,760 | $123,839 | $106,925 | -$65,725 |
| Net Cash Flow-Operating | $175,777 | $177,414 | $141,850 | $117,208 |
| Capital Expenditures | -$12,579 | -$14,096 | -$11,180 | -$24,958 |
| Net Cash Flows-Investing | -$36,018 | -$68,169 | -$47,499 | -$63,808 |
| Dividends Paid | -$29,203 | -$19,014 | -$25,360 | -$35,326 |
| Sale and Purchase of Stock | -$194,932 | $3,979 | -$3,085 | -$15,600 |
| Net Borrowings | $59,500 | -$135,800 | -$120,200 | $84,324 |
| Net Cash Flows-Financing | -$130,686 | -$126,344 | -$11,392 | $75,521 |
| Net Cash Flow | $12,054 | -$38,573 | $91,264 | $126,321 |
While you could argue that Chicago Bridge did issue shares to the value of $4 million and take on new debt capital of $143 million, this is easily manageable when you consider the free cash flow being generated by the company.
Risk Factors
In terms of risk, Chicago Bridge has an F-Score of 6 and a Z-Score of 1.84 indicating that the company is at low risk. With an M-Score of -2.53, this also indicates that the company is not an earnings manipulator.
Valuation
Chicago Bridge is cheap on all metrics. The company has a current market cap of $3.2 billion and an Enterprise Value of $5.16 billion The company is trading on a P/E of 12.25, a P/B of 1.47, a P/S of 0.30, and my favorite, an Acquirer’s Multiple of 5.84. The Acquirer’s Multiple metric is defined as (Enterprise Value divided by Operating Earnings).
More importantly, Chicago Bridge has a Enterprise Value/Free Cash Flow Yield of 11% and a shareholder yield of 7%. Shareholder Yield is one of the most important metrics in investing and is defined as (Buyback Yield plus Dividend Yield). The company currently has a buyback yield of 6% and a dividend yield of 1%.
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