A rising tide does not raise all boats.
Shares of Chicago Bridge and Iron (CBI) were stung last week on the news of a huge pre-announcement of earnings. Apparently CBI would be taking a large charge to for unexpected cost overruns at two of its liquefied natural gas terminals (LNG) in the United Kingdom.
The astronomical rise in commodity prices impacted margins on the project to the tune of approximately $317 million. Ouch. Investors reacted by selling the stock hard, causing shares to plummet nearly 30% intra-day on Wednesday.
Fortunately, last Thursday’s boom in the market lifted CBI back above the $30 level, but this pales in comparison to Monday’s $40.00 stock value. I guess sometimes even the gravy train can fall off track.
Up until this week, it was smooth sailing for CBI. Shares moved steadily higher, as demand for huge construction products increased in direct correlation to the quadrupling of oil prices. That is, until those same rising commodity prices impacted CBI’s raw material costs.
What Comes Around Goes Around
The huge move in oil prices has been a positive move for CBI. That’s because its main business is to build infrastructure for the oil industry. Things like pipelines, roads and off-shore oil refineries. And these aren’t things are cheap to build (see also, “Profit From Big Infrastructure“).
What comes around goes around, I guess. The good news is that commodity prices are beginning to levelout, and this should bode well for future stock earnings.
With a $3 billion market cap, CBI is one of the largest heavy construction firms in the country. Shares are well off CBI’s 52-week high of $63.50 and trade for 18 times trailing earnings, but only 11 times forward earnings.
I would use the current selling as an opportunity to buy shares. The impact of high raw material costs will only last for the short term, and the overwhelming demand in this industry will only add to the stock’s upward momentum.
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