On March 13, 2013, Berkshire Hathaway (


) bought 6,508,600 shares of Chicago Bridge Iron Company (

). You can see
Warren Buffett

‘s stock picks

. His purchase prices were between $46.35 and $62.1, with an
estimated average price of $52.87. The impact to his portfolio
due to this purchase was 0.48%. Is it a good buy or not? Let’s
discuss in the following parts.

Business Description

Chicago Bridge Iron Company (

), founded in 1889 in Chicago, is the most famous energy
infrastructure focused company in the world and a major provider
of government services. In late 2000, CBI embarked on a series of
acquisitions that have expanded its services to encompass the
entire hydrocarbon industry, from conceptual design through
technology licensing, engineering and construction, to final
commissioning and technical services. CBI acquired Lummus Global
from ABB on Nov. 19, 2007, adding approximately 3,000 employees
to the CBI payroll. On Feb. 13, 2013, CBI completed acquisition
of The Shaw Group for a purchase price of US$3.3 billion and CBI
now employs nearly 50,000 people.

Competitive Advantages

1. Worldwide Record of Excellence

CBI’s integrated business model, flexibility and nearly 125 years
of experience working all over the world make them unique among
competitors. Members of their senior leadership team have an
average of approximately 25 years of experience in the
engineering and construction industry.

2. Company Culture and Reputation

Their relentless focus on safety, unmatched talent, superior
project delivery and uncompromising business ethics have been the
base of their reputation and have allowed them to build lasting
relationships with clients worldwide.

3. Strong Health, Safety and Environmental (“HSE”) Performance

CBI’s dedication to safety makes them among the top tier of
safest companies in the industry. In 2012, after completing more
than 70 million work-hours around the globe, CBI achieved a lost
time incident rate (LTIR) of 0.01, which means they had only one
lost time incident for every 20 million hours worked. This
outstanding record includes the achievement of zero lost time
incidents in their Project Engineering and Construction sector
over an expended 40 million work-hours.

4. Integrated Business Model

CBI is comprised of three business sectors: Steel Plate
Structures, Project Engineering and Construction, and Lummus
Technology. Through these business sectors, they offer services
both independently and on an integrated basis.

5. Government Solutions

They lead large, high-profile programs and projects, including
design-build infrastructure projects, for federal, state and
local governments.


Valuation of CBI stems from two main models – FCFF and

We evaluated CBI using an absolute valuation model and a relative
valuation model. We are convinced that the most appropriate
techniques for CBI are the Free Cash Flow to Firm (FCFF), and the
Price/Earnings Ratio (

). The first incorporates the long-term growth opportunity, and
the second reflects the market valuation.

Discounted Cash Flow Model: Free Cash Flow to Firm

Main Assumptions and Forecasts

(1) First, the cost of equity was determined by the CAPM model,
using the 10-year government bond risk-free rate of 2.15%, the
market return (2012) of 14.17% and the beta of 2.00 (at the end
of 2012) to reflect the cost of equity of 26.19%. Second, the
cost of debt was calculated from short-term lending rates (credit
rating BBB corresponding to around 5%) considering the tax shield
effect (tax rate is 32.57%), which was 3.37%. Third, WACC was the
weighted average of the cost of equity and the cost of debt with
weights of 62.89% and 37.11% respectively, which was 17.72%.

(2) From CBI’s past performance, we estimated a growth rate in
revenue of 13.30% in the forecast horizon (2013 to 2017). In
terms of continuation value, the growth rate is estimated as 2%
beyond the forecast horizon. This is because the growth rate for
the long term should be less than the average GDP growth rate.

(3) We use moving median of previous four year data to calculate
the pre-tax margin, interests, investment for property, plant and
equipment, intangibles, total current assets, and total current

Value of Firm = PV (Cash flows over forecast period) + PV
(Continuation Value)

Based on the FCFF model, the estimated price at the end of 2013
is around US$45.58.

Multiple Valuations: Price to Earnings Ratio (


From a short-term point of view, the PER accounts for the market
valuation during macroeconomic is uncertain. We used the P/E Band
to get the price range. Over the past five years, CBI was traded
between 5.2 to 22.8 times. We used the median PER band value of
14.5 to calculate the eventual price. With this method, we got
the final price of CBI at US$48.14.

Weighting of the Models

The shareholding structure of CBI serves as a proxy for the
allocated weights to these two models. 81.31% of CBI shareholders
are institutions and insiders, the 18.69% of shareholders is free
float. The FCFF is more widely used by institutional shareholders
and management executives shareholders who are long-term
oriented. On the contrary, the PER better mirrors shareholders.

By combining two valuation methods to account for the company’s
intrinsic value and the market sentiment, as well as factoring in
the growth potential, the fair price for CBI is US$46.04.
Compared to the current price of US$59.39, it seems not a good
time to buy right now.

Risks to Price Target

The FCFF model relies mostly on the Terminal Value, which is
determined largely by the assumed perpetual growth rate. In
addition to the risks of the perpetual growth rate, the risks of
multiples entail subjectivity of the multiples themselves, being
susceptible to the market conditions.

Financial Analysis

DuPont analysis

Relative advantages ensure stable development

You can check the four direct competitors of CBI


. They are Vinci, Grupo Carso, S.A.B. de C.V., MasTec Inc. and
Singapore Technologies Engineering Ltd. CBI’s ROE of 2012 is
22.05%, slightly lower than Singapore Technologies Engineering
Ltd. Although CBI’s three driving factors of ROE have no absolute
advantages compared to competitors, they do have comparative
advantages. The operating capability, profitability and financial
structure of CBI are balanced and healthy to guarantee the stable
development of the company.

Investment Risks

1. In April, CBI fell admit speculation that Woodside Petroleum
Ltd. might change its strategy regarding a major liquefied
natural gas project. In other words, investors in the stock do
face some risk of projects falling through or being altered.

2. Chicago Bridge Iron does not have a definable strategy.
Therefore, it risks losing out to firms that concentrate on one
particular competitive advantage.


Overall, CBI is a good company with balanced and healthy
operating capability, profitability and financial structure, yet
the market is too optimistic. The stock price now is higher than
the intrinsic value at the end of 2013. Therefore, it is not a
very good time to buy the stock, yet we should still watch this
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