In the second quarter of 2013, Warren Buffett’s Berkshire Hathaway purchased $404 million of Chicago Bridge & Iron (NYSE:CBI) stock in the mid-$50s range, representing 8.8% of CBI’s shares.
Chicago Bridge & Iron Company calls itself the most complete energy infrastructure-focused company in the world. CBI has some of the world’s largest energy companies as its clients, and it will benefit from the continued development of shale oil and gas reserves as projects in these areas start to move forward. In 2013, CBI completed the purchase of the Shaw Group Inc. in a deal valued at about $3.3 billion, in order to expand the company’s nuclear plant building services.
Following Buffett’s purchase – and coinciding with the major push of the U.S. shale oil boom – CBI stock went up close to $90 per share this year. But two things have brought CBI’s stock price back into value territory: 1) falling oil and gas prices means potentially less development of U.S. shale oil – which is profitable only at higher prices, and 2) a June 2014 report by a little-known short seller.
Buffett’s response to the falling share price is classic:
Berkshire Hathaway Inc. is betting the best response to a short seller is to go long.
As Chicago Bridge & Iron Co. plunged 22 percent in the second quarter, Berkshire snapped up additional shares of the engineering-and-construction firm. The purchase came days after a short seller drove down the stock price by saying that CB&I had artificially inflated earnings.
… Adding to the CB&I bet follows a strategy that Buffett has used for decades: identifying companies based on long-term prospects and sticking with them through declines.
– via Bloomberg Business August 21, 2014
CBI is complementary to Berkshire’s Burlington Northern and Mid-America Energy assets. Berkshire Hathaway has also recently built positions in Exxon Mobil (NYSE:XOM), National Oilwell Varco (NYSE:NOV) and Suncor Energy (NYSE:SU). This makes the CBI investment appear to be part of a broader energy thesis.
At today’s stock price, CBI has a $5 billion market cap, yet the company has more than $30 billion in backlog of contracts. And you can now enter into CBI stock at prices believed to be below where Warren Buffett bought in.
My analysis of CBI’s intrinsic value:
It’s all about the cash.
The value of any stock, bond or business today is determined by the cash inflows and outflows – discounted at an appropriate interest rate – that can be expected to occur during the remaining life of the asset.”
– Buffett quoting John Burr Williams
I’ve written previously about Buffett’s “3 Pillars Approach” to calculating the intrinsic value of a stock. The table below summarizes my analysis of CBI:
CBI stock sold for below $45.20 yesterday and for a few hours today, before bouncing back above $46. I was happy to purchase the stock today and join Warren Buffett in ownership. This is a long-term play on the energy sector. The stock is 5% of my portfolio.