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Berkshire Hathaway Inc. (BRK.A), Chicago Bridge & Iron Company N.V. (CBI): When Buffett Speaks – We Listen

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Mr. Buffett, the CEO of Berkshire Hathaway Inc. (NYSE:BRK.A) is famous for his unique investment theses. He just loves to invest in branded consumer products, such as See’s Candy, The Coca-Cola Company (NYSE:KO), and lately Heinz ketchup and sauces. The reason he prefers branded consumer products is that they require low capital expenditure, and can therefore replicate their success exponentially. After all, there’s no need to buy jets or finance the construction of new roads to maintain the production of The Coca-Cola Company (NYSE:KO) bottles. It’s easy, and most importantly, it’s cheap. That’s why it’s worth paying close attention to times when Mr. Buffett deviates from his well known philosophy and buys into capital intensive businesses like infrastructure. In the first quarter of 2013, he did just that.

Warren Buffett

Berkshire’s infrastructure play

According to a regulatory filing at the end of March, Berkshire Hathaway Inc. (NYSE:BRK.A) owned about 6.5 million shares of Chicago Bridge & Iron Company N.V. (NYSE:CBI). The average purchase price for shares was probably somewhere in the area of $50 per share. As of now, shares are hovering around $60, valuing his total position at $390 million. Ironically, Chicago Bridge & Iron Company N.V. (NYSE:CBI) isn’t based in Chicago. And it’s been decades since it derived revenues from bridges or iron. Today, CB&I is a Netherlands-based leader in the energy infrastructure business. CB&I was founded in 1889 to design and build bridges. By the early 20th century, it had already shifted its focus to bulk liquid storage tanks and vessels that transport oil and other refined products. It has been one of the key providers of infrastructure to the energy sector for a long time. Today, it’s a big, global company that has its fingers in almost every major energy project in the world. The position in Chicago Bridge & Iron Company N.V. (NYSE:CBI) has been added to Berkshire Hathaway Inc. (NYSE:BRK.A)’s infrastructure portfolio, together with MidAmerican Energy and Burlington Santa Fe, a railroad.

A look into the future

One great thing about companies with long-tailed projects is they often disclose their project “backlog,” which is the projects that the company has won but hasn’t started working on yet (and therefore, hasn’t yet been recognized as revenue). Looking at the backlog list is kind of like getting a glimpse into the future growth of the company. If a company is growing but backlog is shrinking, that’s a red flag that growth may be ending. Conversely, if a company’s backlog is consistently growing, that’s a sure sign that earnings and revenues will also grow. Chicago Bridge & Iron Company N.V. (NYSE:CBI)’s backlog was a robust $6.9 billion at the end of 2010. A year later, the backlog had grown to $9 billion.

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