Goldman views Chicago Bridge & Iron as a levered oil play. Crude oil is trading above $90 a barrel, currently, and demand is growing amid the global recovery. Engineering and construction backlogs are inflecting and Goldman expects investors to start paying higher multiples for stocks in the sector, with Chicago Bridge & Iron offering the most upside. As the recovery progresses, this late-cycle group will rally.
Furthermore, Chicago Bridge & Iron's stock is undervalued, trading at a trailing earnings multiple of 19, a forward earnings multiple of 15 and a cash flow multiple of 15, 35%, 36% and 50% discounts to industry averages. The company has a pristine balance sheet, with $361 million of cash and equivalents and $121 million of debt at third-quarter's end. The company will release fourth-quarter results on Feb. 22. Most recently, it announced $90 million of work booked for the Kearl oil sands project, which missed Goldman's full-year estimate of $600 to $700 million.Still, Goldman expects the company to book significantly more business as result of the Kearl project. According to Chicago's management, Imperial Oil "has yet to fully release Chicago Bridge & Iron's potential scope on the project." Thus, Chicago will miss its 2010 award guidance when it reports results in two weeks, but its "earnings story is intact." The stock receives "buy" ratings from 71% of researchers in coverage. Macquarie, an energy-focused bank, forecasts that the stock will advance 45% to $50.