CBI - Chicago Bridge & Iron

[Aberhound]

BRK owns 9% and the stock is down because of this short seller report. The analysis is worth reviewing for its lessons and cleverly uses Buffett's own writing to support the short analysis. It looks like a pick of one of the new hires. Did he miss something in 2013 when he bought or added?

 

http://seekingalpha.com/article/2272133-chicago-bridge-and-iron-acquisition-accounting-shenanigans-dramatically-inflate-profitability-prescience-point-initiates-at-strong-sell

 

Yes a premium of over 70% when buying Shaw may be overpaying and fixed price construction projects are extremely risky. But the company enjoys massive tailwinds due to cheap natural gas in the US. Buying a cyclical late in a cycle is risky look how low the share price got in 2008! This could get very interesting particularly if you are bullish on the US energy sector as I am.

[topofeaturellc]

Shaw was one of those companies where there were always rumors of aggressive pricing, aggressive accounting, and a promotional management team. I have no idea how true they were.  I'm actually surprised it took one of the short selling outfits this long to target CBI post-deal

 

E&C companies usually take a while to right things if they have these sorts of issues in their back book.  Not to mention the negative NWC nature of these things can make it really ugly while that happens. 

 

At the same time there is a reason why these businesses are accounted for the way they are. So the "But Cash Flow is totally different from the P&L" argument is not always as smart as it sounds.

 

I just think its pretty much impossible to underwrite if shenanigans are really going on with the Accruals, unless its something just hideously obvious.

 

But these things can go out of business in a flash.  Even with Balance Sheets that look OK. 

 

And frankly, even if you think earnings are real, this thing ain't that cheap on a trailing basis.

 

IDK - I'd be more inclined to look at it if earnings were really depressed and they'd already taken a bunch of charges for the back book. 

[Palantir]

I am unclear, are you looking at this as a long or a short?

[topofeaturellc]

I interpreted OP as a Long.  I'm not looking at it unless it really blows up.

[PatientCheetah]

I read the short's presentation. I think the truth is somewhere in between. What do you guys think of its real earnings power?

[topofeaturellc]

I struggle to come up with a way to figure that out if you don't trust the accounting.

 

Maybe something like the last ten years CFO backing out prepayment growth? If I could buy it on a really nice yield on that and I thought they could survive needing to convert a bunch of current liabilities to debt at a time of stress  - it might be interesting?  Hard question.  The negative NWC nature of the biz automatically reduces a lot of the margin of safety.

 

If you want to see what can happen to businesses like this take a look at Maire Technimont - which had a bunch of contracts go bad that ended up costing them multiple years of EBIT, or Royal Imtech - which was an accounting scandal at a national subsidiary level (actually read the forensic report they've got on that. Its kind of awesome). Both of them ended requiring rescue equity offerings despite B/S ratios that looked pretty solid pre-problems. MT was net cash when they announced the first problems.

[HWWProject]

Thought I'd start a discussion on CBI for this group.  I recently purchased CBI at $45 per share and recommend keeping an eye on it. 

 

Summary

 

  * Warren Buffett's Berkshire Hathaway keeps buying more of Chicago Bridge & Iron, and now owns nearly 10% of the company.

  * CBI stock has fallen nearly 50% this year, along with falling oil prices and a short-thesis article this summer.

  * My calculation of Intrinsic Value shows now is the time to join Buffett for a long-term play in the energy sector.

 

Link to SA article:  http://seekingalpha.com/article/2572105-chicago-bridge-and-iron-an-excellent-long-term-buy-in-the-energy-sector

 

CBI covers the entire energy infrastructure sector, but has been under pressure due to falling oil prices.  I believe now is a great opportunity to enter below Berkshire's buying price.

 

 

[ZenaidaMacroura]

This is interesting - they bought a company called Lummus that designs cracking furnaces for ethane ->ethylene processes.  I think cracking capacity is expanding at breakneck pace - not sure how significant that is to the bottom line but my company has a few large projects in the works that use their SRT furnaces...

[handycap5]

a conversation on CBI requires rebuttal of the short thesis: http://www.presciencepoint.com/uncategorized/chicago-bridge-and-iron-june-17-2014/

 

I think it is overstated, but it did give me pause. But the accounting in this industry seems to be analogous to insurance, where the income statements (and now balance sheets with the M&A) are have a lot of discretion over the short and medium term. Management credibility is important. I was surprised the company's response was an ad hominem attack without substantive rebuttals. Nor was the conference call informative. 

 

I assume Todd likes it, but can someone explain why it shouldn't just go in the "too hard" pile? Why not buy JEC instead, Ruane has made it a small position?

 

i look forward to learning from your thinking...

[HWWProject]

Short-thesis articles on SA always give me some concern, but then again I haven't found it useful to dive too deep into them either.  Perhaps that's wrong but SA is fertile ground for pump-and-dump schemes.  I'll offer two notes:

 

1) Berkshire Hathaway increased its ownership of CBI this summer when the price fell as a reaction to this article.  They now own near 10% of CBI.  I can see CBI being a buyout candidate by Berkshire.

 

2) Herb Greenberg of TheStreet.com said the following in his June 18, 2014 article (with regards to the short-thesis):

 

"Ken Hackel, of CT Capital, who wrote the book, "Security Valuation and Risk Analysis" -- and who also does detailed accounting work, and goes long and short stocks -- sent out a note this morning that said:

 

    CBI was a stock we recommended until last fall and are familiar with its accounting. The stock more than doubled for us.

 

    I believe the short seller does not have a clear understanding of CBI's 'contract capital' account which does indeed fluctuate greatly and is related to the need for working capital (as well as payments) on projects. Large projects are especially vulnerable.  I don't always agree with Ken, but he does know his accounting and I have a history with him being significantly more right than wrong."

 

 

[TwoCitiesCapital]

Short-thesis articles on SA always give me some concern, but then again I haven't found it useful to dive too deep into them either.  Perhaps that's wrong but SA is fertile ground for pump-and-dump schemes.  I'll offer two notes:

 

1) Berkshire Hathaway increased its ownership of CBI this summer when the price fell as a reaction to this article.  They now own near 10% of CBI.  I can see CBI being a buyout candidate by Berkshire.

 

2) Herb Greenberg of TheStreet.com said the following in his June 18, 2014 article (with regards to the short-thesis):

 

"Ken Hackel, of CT Capital, who wrote the book, "Security Valuation and Risk Analysis" -- and who also does detailed accounting work, and goes long and short stocks -- sent out a note this morning that said:

 

    CBI was a stock we recommended until last fall and are familiar with its accounting. The stock more than doubled for us.

 

    I believe the short seller does not have a clear understanding of CBI's 'contract capital' account which does indeed fluctuate greatly and is related to the need for working capital (as well as payments) on projects. Large projects are especially vulnerable.  I don't always agree with Ken, but he does know his accounting and I have a history with him being significantly more right than wrong."

 

Would agree here. I've read Ken's book and it's clear he has a strong grasp of accounting. I'd take Ken's accounting analysis over some unknown any day.

[HWWProject]

Thanks.  I'd never heard of Ken Hackel prior to researching CBI.  I've just done some research on him and went ahead and ordered his book.  Should be a valuable aid in performing DCF analysis.

[handycap5]

has anyone done any real work on the carrying value of shaw's contracts and the goodwill and how this all works? in my experience, re-booking an acquisition as many times and as long after the closing is highly unusual. rather than discuss this by proxy, can anyone start a conversation on the substance? if i owned the stock, i would want to explain this in reasonable detail. this is why there may be an opportunity in the stock, and also why the stock is (perhaps rightly) cheap. thanks!

[100 Shares]

Here goes my first post. I've been an observer on this board for a year or two now and decided to finally make some noise.

 

Anyways, I'm honestly surprised more discussion hasn't occurred around CBI considering Todd Combs and Joel Greenblatt have significant positions in it. I didn't buy it because they own it but I definitely started to look into once I saw the price come down to the 60s.  At first I found the negative cash flow concerning but after digging into it I decided to invest. As an observer I couldn't find much analysis of the company on here and none on value investor's club, so as a newbie to investing I took independent research to a new meaning on this one. I've wrote an article on just one part of what I discovered when doing my research here: http://seekingalpha.com/article/2660735-chicago-bridge-and-iron-temporary-negative-cash-flow-leads-to-golden-opportunity . Would love to get some more discussing about CBI going on here...

[jouni1]

i sort of like it at these levels too. don't have much to add yet, must dig in a bit  :P 

[MrB]

Interesting take on the Vogtle/VC Summer delays/overruns

 

http://ansnuclearcafe.org/category/reactor-designs/westinghouse/

[HWWProject]

Great article 100 Shares, and thanks for the link MrB.  I'm feeling much more comfortable with my own analysis and entry point into CBI.  Hope to own this one for years.

 

 

[KCLarkin]

Interesting take on the Vogtle/VC Summer delays/overruns

 

http://ansnuclearcafe.org/category/reactor-designs/westinghouse/

 

Great article, thanks. Will CBI will be reimbursed for the cost and schedule overruns caused by the design change? CBI management seems pretty confident that they will.

[MrB]

Interesting take on the Vogtle/VC Summer delays/overruns

 

http://ansnuclearcafe.org/category/reactor-designs/westinghouse/

 

Great article, thanks. Will CBI will be reimbursed for the cost and schedule overruns caused by the design change? CBI management seems pretty confident that they will.

 

Settlement seems most likely. The following is one of the better reads I've found.

 

http://www.georgiapower.com/docs/about-energy/9th-10th-VCM-Report.pdf

 

You can also scratch around here

http://www.psc.state.ga.us/factsv2/DocumentSearch.aspx?status=&docketNumber=&documentNumber=&desc=vogtle&company=&industry=&filingFrom=&filingTo=&receivedFrom=&receivedTo=

[KCLarkin]

Settlement seems most likely. The following is one of the better reads I've found.

 

http://www.georgiapower.com/docs/about-energy/9th-10th-VCM-Report.pdf

 

You can also scratch around here

http://www.psc.state.ga.us/factsv2/DocumentSearch.aspx?status=&docketNumber=&documentNumber=&desc=vogtle&company=&industry=&filingFrom=&filingTo=&receivedFrom=&receivedTo=

 

Thanks.

 

In February 2013, Chicago Bridge & Iron (“CB&I”) acquired Shaw Group and

immediately transitioned as Westinghouse Electric Cooperation’s (“Westinghouse”) consortium

partner at the Vogtle 3 and 4 site. This change resulted in key leadership changes and the Company has

seen overall improvement in the Contractor’s transparency, cooperation and communication as well as

execution with a focus on quality and schedule.

[MrB]

From Oglethorpe's (30% Vogtle owner) latest Q (p.18)

http://www.opc.com/oracle_cons/groups/public/@opc-web/documents/webcontent/ct_001484.pdf

 

Stone & Webster=CBI sub

 

"Contingencies and Regulatory Matters.

Management does not anticipate that the liabilities, if any, for any current proceedings against us

will have a material effect on our financial condition or results of operations. However, at this

time, the ultimate outcome of any pending or potential litigation cannot be determined.

 

a. Nuclear Construction

In April 2008, Georgia Power Company, acting for itself and as agent for us, the Municipal

Electric Authority of Georgia, and the City of Dalton, Georgia (collectively, the Co-owners), and

Westinghouse Electric Company LLC and Stone & Webster, Inc. (collectively, the Contractor)

entered into an engineering, procurement, and construction agreement to design, engineer,

procure, and construct two AP1000 nuclear units with electric generating capacity of approximately

1,100 megawatts each and related facilities, structures, and improvements at Plant Vogtle (Vogtle

Units No. 3 and No. 4).

Under the agreement, the Co-Owners and the Contractor have established both informal and

formal dispute resolution procedures in order to resolve issues arising during the course of

constructing a project of this magnitude. Georgia Power, on behalf of the Co-owners, has

successfully initiated both formal and informal claims through these procedures, including ongoing

claims. When matters are not resolved through these procedures, the parties may proceed to

litigation. The Contractor and the Co-owners are involved in litigation with respect to certain

claims that have not been resolved through the formal dispute resolution process.

Current litigation relates to costs associated with design changes to the Westinghouse AP1000

Design Control Document (DCD) and costs associated with delays in the project schedule related

to the timing of approval of the DCD and issuance of the combined construction permits and

operating licenses by the Nuclear Regulatory Commission. In July 2012, the Co-owners and

Contractor began negotiations regarding these costs, including the assertion by the Contractor that

the Co-owners are responsible for these costs under the terms of the agreement. On November 1,

2012, the Co-owners filed suit against the Contractor in the U.S. District Court for the Southern

District of Georgia, seeking a declaratory judgment that the Co-owners are not responsible for

these costs. Also on November 1, 2012, the Contractor filed suit against the Co-owners in the U.S.

District Court for the District of Columbia alleging the Co-owners are responsible for these costs.

In August 2013, the U.S. District Court for the District of Columbia dismissed the Contractor’s

suit, ruling that proper venue is the U.S. District Court for the Southern District of Georgia. In

September 2013, the Contractor appealed the decision to the U.S. Court of Appeals for the

District of Columbia.

The portion of the additional costs claimed by the Contractor in its initial complaint that would be

attributable to us, based on our ownership interest, was approximately $280 million in 2008 dollars

with respect to these issues. The Contractor has also asserted that it is entitled to further schedule

extensions. On May 22, 2014, the Contractor filed an amended counterclaim to the lawsuit pending

in the Southern District of Georgia alleging that (i) the design changes to the DCD imposed by

the Nuclear Regulatory Commission have delayed module production and the impacts to the

Contractor are recoverable by the Contractor under the agreement and (ii) the changes to the

basemat rebar design required by the Nuclear Regulatory Commission caused additional costs and

delays recoverable by the Contractor under the agreement. The Contractor did not specify in its

amended counterclaim claimed amounts relating to these new allegations but such claimed

amounts could be substantial. Georgia Power, on behalf of the Co-owners, has not agreed with

either the proposed cost or schedule adjustments or that the Co-owners have any responsibility for

costs related to these issues.

 

While litigation is ongoing and Georgia Power and the Co-owners intend to vigorously defend

their positions, Georgia Power and the Co-owners also expect negotiations with the Contractor to

continue with respect to cost and schedule during which time the parties will attempt to reach a

mutually acceptable compromise of their positions.

If any or all of these costs are ultimately imposed on the Co-owners, we will capitalize the costs

attributable to us. As of June 30, 2014, no material amounts have been recorded related to this

claim. Additional claims by the Contractor or Georgia Power, on behalf of the Co-owners, are also

likely to arise throughout construction."

 

Allegedly  S&W can recover from Westinghouse what they cannot recover from the owners. Anyone that can provide more color on this?

[MrB]

....and page 9&10 of the 10k

http://www.opc.com/oracle_cons/groups/public/@opc-web/documents/webcontent/cs_002551.pdf

 

[MrB]

For those who, like me, needs quite a bit of education on LNG

http://www.oxfordenergy.org/wpcms/wp-content/uploads/2014/02/NG-83.pdf

[MrB]

Current lawsuit/dispute amounts between CBI and owners on all three nuclear projects. Sources in brackets.

 

Vogtle $933m (10k & CC)

VC Summer $244m (CC)

Levy $512m (CC/news reports)

 

I don't think these should be treated as anything more than ballparks. However, costs are real and someone is one the hook.

[KCLarkin]

Current lawsuit/dispute amounts between CBI and owners on all three nuclear projects. Sources in brackets.

 

Vogtle $933m (10k & CC)

VC Summer $244m (CC)

Levy $512m (CC/news reports)

 

I don't think these should be treated as anything more than ballparks. However, costs are real and someone is one the hook.

 

Are those amounts just what CBI claims? Or does that include any Westinghouse et al claims?