Monday, August 26, 2013

A Warren Buffett Stock Too High To Buy

After last week reported Warren Buffett added to his position in Chicago Bridge & Iron Company NV (NYSE: CBI), shares gained $2.00 to close the week @ $61.37.

This weekend when I examined the statement of cash flow of CBI, I couldn't believe my eyes to find negative operational cash flow and negative free cash flow for the trailing twelve months (ending 6/2013)

For the first time in my 24 year career it is the first time that I've come across a stock holding of Warren Buffett that had negative cash flow.

Trailing Twelve months ending June 30,2013:
Net Income:           $309.5 million
Operational CF:    -$127 million
Free Cash Flow:   -$206 million

Reporter Jonas Elmerraji of TheStreet points in his article to the huge upfront costs:
     "The acquisition of the Shaw Group made the firm one of the biggest manufacturers of nuclear energy facilities, which carry huge upfront construction costs in exchange for extremely low operating costs. That's an attractive tradeoff when corporate balance sheets are stuffed but uncertainty remains high."

Buffett is a long term investor and looks out 5-10-30 years when he takes a stock position, so we'll know if  the Oracle of Omaha made a great investment one day in the distant future.

NOTE: One year ago today I warned on a Carl Icahn stock holding CVR ENERGY (NYSE: CVI) @ $23.60 for having negative operational cash flow but by year end the company reported record operational cash flow and shares closed Friday $44.37. Operational Cash Flow turned positive after CVI reported 2nd Quarter 2012 financials and became a buy on August 30,2012 so maybe CBI 3rd quarter will tell a different tale.

Buffett on Cash Flow:
Warren Buffett, Chairman of Berkshire Hathaway: 2000 Annual Report:
"Common yardsticks such as dividend yield, the ratio of price to earnings or to book value, and even growth rates have nothing to do with valuation except to the extent they provide clues to the amount and timing of cash flows into and from the business. Indeed, growth can destroy value if it requires cash inputs in the early years of a project or enterprise that exceed the discounted value of the cash that those assets will generate in later years.
Market commentators and investment managers who glibly refer to growth and value styles as contrasting approaches to investment are displaying their ignorance, not their sophistication. Growth is simply a component--usually a plus, sometimes a minus-- in the value equation."