Chicago Bridge: Connecting the World

10/04/2013 7:00 am EST

Focus: STOCKS

Stephen Leeb

Founder and Research Chairman, Leeb Group

Our latest recommendation is one of the world's largest and most diverse energy distribution infrastructure companies. Its diversity makes it capable of meeting the needs of developed and developing countries alike, says Stephen Leeb, editor of the Complete Investor.

The engineering projects at Chicago Bridge & Iron (CBI) range from construction of liquefied natural gas tanks and nuclear containment vessels to large-scale projects like gas-processing plants, refineries, and petrochemical complexes.

Through its Lummus Technology subsidiary, it provides a wide range of materials, equipment, and services to the refining, gas-processing, and petrochemical industries.

The company's recent acquisition of Shaw Industries has broadened its scope further, adding consulting services to nuclear and fossil-fuel plants and a dedicated environmental infrastructure division that focuses on sustainability, energy efficiency, and emergency response to environmental disasters.

These areas—energy efficiency and environmental controls, where the Shaw group has franchise-like positions—will likely be among the fastest-growing segments of the energy industry over the long-term.

Another plus is that the Shaw subsidiary also performs basic maintenance services, giving it a role throughout a project's entire life cycle.

As a result, the acquisition delivers both cost and revenue synergies to a company that is equally well-positioned to serve shale development in the US, the construction of energy plants in the developing world, and environmental consulting.

Profits in 2012 of $3.07 a share were 80% higher than pre-recession peak earnings of $1.71 in 2007. With Shaw making a full contribution in 2013 and synergies kicking in, we expect profits to climb by about 35% this year. Our five-year growth estimate of 18% a year will likely prove conservative.

Worth emphasizing is that Chicago Bridge & Iron has an edge in health safety and environmental performance (known as HSE).

Given the unfortunate frequency of catastrophes relating to energy production, this superlative HSE record, not only leads to lower costs, but also means the company won't be rejected for a project because of past transgressions.

One metric the company cites is that lost workdays are just 1% of the industry average.

Although the Shaw purchase added to debt, the balance sheet is still strong, and the company generates a great deal of free cash flow. Based on the current price, the free cash flow yield could approach 10% in 2013.

We view Chicago Bridge & Iron as one of the best infrastructure plays around, and can see the stock topping $100 within the next 24 months.

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