2 unknown US companies to rebuild Japan
Industry giants like Caterpillar aren't the only players that will benefit from post-quake reconstruction.
By Jake Lynch, TheStreet
But two smaller companies, whose shares have recently climbed, are Chicago Bridge & Iron (CBI) and Clean Harbors (CLH). With market values of $3.8 billion and $2.5 billion, respectively, they are Japan-rebuild plays that demand consideration. They have clean balance sheets and competent stewardship. Below is a closer look. Still, investors ought to do further research.
2. Chicago Bridge & Iron (CBI) is an energy-infrastructure specialist. Founded in 1889 by Horace E. Horton, a bridge designer, Chicago Bridge & Iron's registered office is now in the Netherlands, but headquarters are in The Woodlands, Texas.
A conglomerate with operations worldwide, CB&I has carved a profitable niche for itself in energy infrastructure. Its Lummus division designs and constructs upstream and downstream oil-and-gas projects and its Steel Plate Structure unit builds, among other things, nuclear containment vessels. Regardless of how Japanese officials view nuclear energy post-quake, CB&I is poised to benefit due to its diversified offerings.
Chicago Bridge & Iron has been a top-performing stock in 2011, up 19% already. It is listed on the Conviction Buy List at Goldman Sachs (GS), which has a $42 target on the stock. Construction and engineering equities fall into the category of late-cycle beneficiaries. Their businesses tend to thrive in maturing growth cycles as demand for energy increases.
Given the economy's recent pickup and crude oil's spike, CB&I was already a favored momentum name. The recent turmoil in Japan offers another potential catalyst for the company's earnings in 2011 and 2012. Aside from Goldman, 14 other analysts rate CB&I "buy" and six rate it "hold." None rank shares "sell."
CB&I's stock has a median price target of $42.07, implying modest 8% upside from current levels. The highest 12-month target comes from Citigroup (C), which expects the stock to advance 35% to $52.50. In contrast, Jefferies (JEF) rates CB&I "hold", valuing the stock at $37.
On the basis of business fundamentals, there is reason for optimism. CB&I's adjusted fourth-quarter earnings advanced 55% to 63 cents, exceeding researchers' consensus forecast by 13%. Sales fell 8.7% to $948 million, missing consensus by 11%. Thus, profit growth resulted from higher profit spreads. CB&I quarterly gross margin climbed from 14% to 15% and the operating margin expanded from 7.4% to 8.4%.
The balance sheet is outstanding relative to those of industrial peers. CB&I's cash balance rose 48% to $482 million in the latest quarter, for a quick ratio of 0.7, as debt fell 34% to $80 million, for a debt-to-equity ratio of just 0.1. Quarterly return on equity, at 19%, exceeded the industry average of 10% and the S&P 500 ($INX) average of 13%. Return on assets, a measure of overall profitability, widened from 5.8% to 8.4%, signaling improved efficiency.
In spite of these outstanding metrics, CB&I is a stock with notable risks. Its capital-intensive business is leveraged to the economic growth cycle, so any decline or spike in worry pertaining to the economy could catalyze a rapid sell-off.
This threat is evident in the stock's beta value, a measure of market correlation, of 2.3. On up days, CB&I tends to magnify market gains and, on down days, it accentuates declines. In addition to analyst favor, the equity's valuation should mitigate this risk. CB&I's stock trades at a trailing earnings multiple of 18, a forward earnings multiple of 14 and a cash flow multiple of 13, discounts of 24%, 33% and 60% to construction and engineering industry averages.
CB&I's stock has managed to rise more than 9% so far in March in spite of Middle East unrest and a broader market correction.
1. Clean Harbors (CLH) is an under-the-radar hedge for so-called black-swan events. The increasing frequency of unexpected market-moving phenomenon is a topic of debate in the financial community. But Clean Harbors is a beneficiary of unforeseen natural disasters. Its business spiked due to Hurricane Katrina, the recent BP (BP) Gulf spill and, now, investors expect contracts for the Japan clean-up and rebuild.
Clean Harbors, founded in 1980 by Chief Executive Officer Alan McKim, has an emergency-services division with expertise in cleaning up chemical spills and infectious contaminants. It is a key growth division for the Norwell, Mass.-based company.
The division consults with governments, providing planning, logistics and project-management services. McKim disclosed to CNBC that his firm has already been contacted by Japanese officials.
Although Clean Harbors is technically a small-cap company, its participation in the aforementioned headline clean-up efforts has elevated it to the status of disaster-logistics go-to. Clean Harbors has grown its sales, net income and earnings per share 22%, 43% and 31% annually, on average, since 2008 and its stock delivered annualized gains of 13% over that span. Although Japan is the latest catalyst for the equity, global warming, and its resultant environmental volatility, could continue to provide Clean Harbors with lucrative global expansion opportunities. Thus, it's a buy-and-hold stock.
Analysts have a positive, though not ebullient, view of the stock, with eight ranking it "buy" and six rating it "hold." None rank it "sell." The stock has a median target of $100.54, suggesting a 12-month rise of just 7%. RBC Capital Markets ranks Clean Harbors a "top pick" and forecasts an advance of 14% to $107. Goldman Sachs, on the other hand, ranks it "neutral," expecting the stock to fall to $85.
Currently, uncertainty plagues the stock as the size and scope of Japan's clean-up efforts are undisclosed as is Clean Harbors' depth of involvement. Goldman's "neutral" ranking is justifiable based on valuation. The stock costs 23 times forward earnings and 3.2 times book value.
Those multiples signify premiums to industry and peer averages. Still, Clean Harbors' recent business performance is praiseworthy. Its fourth-quarter adjusted earnings surged 71% to 88 cents, exceeding consensus expectations by 11%. Sales grew 20% to $417 million, outperforming consensus by 6.7%. And profit margin improves, as well. The gross margin stretched from 27% to 30% and the operating margin widened from 8.2% past 10%, amplifying the bottom-line.
Unlike CB&I, Clean Harbors is comparatively uncorrelated to the market, with a beta value of 0.4. And it often gains on events which negatively impact other equities. It has risen 2.5% in March as the S&P 500 fell 3.5%.
Clean Harbors' quarterly return on equity improved to 16% from 5.7% in the year-earlier quarter and also exceeded the industry average of 13% and S&P 500 average of 13%. Its return on assets stretched from 2.6% to 8.1% year-over-year, demonstrating improved efficiency. At quarter's end, Clean Harbors held $305 million of cash, for an ample quick ratio of 2.2, and $279 million of debt, for a debt-to-equity ratio of 0.4.
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