1. Chicago Bridge & Iron CompanyN.V. (CBI – US)
Recommendation:Hold|Target Price: $29.74, CurrentPrice: $28.69
U.S and Global Market
InU.S., employersadded156,000 positionsin September,showingthathiringwasstill
strong.The Britishpound maintained depreciation andfell close toitslowestlevel inhistory.
The Japanese currencyhasdeclined3.5% againstthe dollar,contributingto the Bankof
Japan’sgoal of furtherinflationandimports. The Deutsche BankCrisis remainedandmight
threatenthe Eurozone economy. Chinareportedlower-than-expectedSeptemberforeign
exchange reserves andweakestYuansince January.
Construction& Engineering
Since inception,October12th
in2012, S&PComposite 1500 Construction&Engineering
Index rose 17.94%, versus the increase of S&PComposite1500, 48.34%. AccordingtoS&P
Capital IQ,the projectionof EPSgrowthwas18%, comparedto a 55% increase in2015.
Weak oil andgas pricingwouldremainoverthe nextcoupleof years,while the industry
shouldbenefitfrom risingdemandforchemicals,infrastructureandenvironmental projects
overthe nextfewyears. One example was anew five-year$305 billiontransportation
fundingbill afternumerousstopgapbillsoverthe past11 years. Consideringthese two
factors,the fundamentaloutlookforthe industrywasneutral.
Chicago Bridge & Iron CompanyN.V.
ChicagoBridge & IronCompanyfocusedonengineeringandconstruction,especially
projectsforoil andgas companies. However,half of itsrevenuecame fromfabricationand
capital services.Itsstockhada dividendyieldof 0.97%.Its nextupcomingeventwasthe Q3
2016 earningsreleasedatOctober25th
. The stockprice wouldfluctuate if the actual EPSwas
significantlydifferentfromthe estimatedone,1.17.
Basedon averagedprice multipleof the industryprovidedbyThomsonone,the
estimatedprice derivedfromPrice /Bookvalue was$29.58.1
Accordingtothe Yahoo!Finance,the betawas 2.33. Basedon CAPM,the requiredrate
of returnwas35.15%2
, and itsWACC wascalculatedas 18.61%3
. Basedon the forecasted
cash flowprovidedbyFactset,the estimatedstockprice derivedfromFCFEmodel was
$26.244
, assumingthatthe growthrate of operatingcashflow of 2019 were half of the cash
1 CBI’s Book Valueper share*averagePrice/Book valueratio in the industry = 21.34*1.39 = 29.58. The
prices derived from P/E ratio and P/Cash flow ratio were respectively negative and far from reality.
2 S&P 500 moving averagein 7/8 : 2079.52,10/8: 2153.24 , 3-month market return =
(2153.24-2079.52)/ 2079.52 = 0.0355,quarter required rate of return = risk-freerate+ beta*(market
return – risk free return) = 0.0033+2.33*(0.0355-0.0033)=0.0782,Annual required rate of return =
(1+0.0782)^4-1 = 0.3515
3 Weighted averagecostof capital =weight of equity * coston equity + weight of debt * coston debt
* (1 - tax rate) = 0.4956*0.3515 + 0.5044*0.0337*(1-0.2991) = 0.1861
The number of coston debt is based on CBI’s creditrating:BBB
4

2. flows’growthin2018, andthe growratesof furtheryearswere the half of previousone.The
constantexpected growthrate after2021 was -2.83%5
.
Assumingthatgrowthof expectedEPSwas half the expectedgrowthof operatingcash
flowin20186
, the farthestestimationprovidedbyFactset,the valuepershare derivedfrom
residual income model was$33.417
, comprisingabookvalue pershare of $21.34 and the
sumof presentvalue of expectedfuture residual incomes, $12.07.
In conclusion,the targetprice shouldbe around $29.74, the average of three estimated
stockprices.Therefore, Irecommend holdingthe stock.
2015 2016 2017 2018 2019 2020 2021
CFO growth
rate -121.29% -1357.50% -8.42% -11.33% -5.67% -2.83% -2.83%
CFO -56 707 647 574.00 541.48 526.14 511.23
Net Borrowing 768 0 0 0 0 0 0
Capital
Expenditure
79 98 109 115 108.48 105.41 102.42
FCFE 633 609 539 459 433 421 408.81
Terminal Value 1906.24
PV of FCFE 583.76 435.25 312.62 248.63 1126.50
Factset only provideestimation of CFO and capital expenditurebetween 2016 and 2018.
Net borrowingin 2012,2013, 2014,2015 is -53,1763, -5, 768.I assumed the followingnet borrowings
were all zero.
Expected growth rate of capital expenditureis assumed to be the same as the expected growth rate of
operatingcash flow.
FCFE = CFO + net borrowing – capital expenditure
Sum of FCFE after 2020 = FCFE in 2021 / (WACC – constantgrowth rate) = 1906.24.Its present valueis
included in PV of FCFE in 2020.
Sum of PV of FCFE : 2796.76,outstandingshares:103.16 (Million),estimated stock price=
2796.76/103.16 = 26.24
5 Growth ratein 2019 is estimated at -5.67%, the half of one in 2018,and the constantgrowth rate is
-2.83% in 2020, the half of one in 2019.
6 Expected growth rate of EPS is assumed to be the same as the expected growth rateof operating
cash flow.Therefore, itis -5.67% in 2019 and -2.83% in 2020.
7
2014 2015 2016 2017 2018 2019 2020
Expected EPS growth
rate -5.67% -2.83%
Expected EPS 5.21 5.86 4.81 4.67 4.45 4.20 4.08
Book Value(lastyear) 26.19 19.22 23.86 28.89 32.71 32.71
Residual Income 3.31 2.81 2.19 1.64 1.52
Terminal value 4.01
PV of Residual
Income 3.25 2.56 1.85 4.42
Residual Income= expected EPS - Book Value(lastyear)*coston equity
Sum of present valueof residual income= 12.07