CBI - Chicago Bridge & Iron

[berkshire101]

I sucked my thumb while this was in the 30s but cash flow was very strong this quarter so I just bought on the big gap up.

 

I'm thumb sucking too.  I had their annual report sitting on my desktop ready to read, but I never go around to it. 

[Kiltacular]

http://finance.yahoo.com/news/cb-reports-strong-2014-fourth-210100635.html

 

Commenting on CB&I's outlook for 2015, Mr. Asherman stated, "We project less than 5 percent of our revenue from new bookings could be affected by timing risks associated with lower oil prices. Accordingly, we think it is prudent to marginally adjust our guidance to revenue of $14.4 billion - $15.2 billion and earnings per share of $5.55 - $6.05."

 

Very nice call by this guy -- I believe he posts here.

 

http://seekingalpha.com/article/2748385-chicago-bridge-and-iron-falls-with-oil-prices-despite-having-virtually-no-oil-exposure

[wachtwoord]

I sucked my thumb while this was in the 30s but cash flow was very strong this quarter so I just bought on the big gap up.

 

I'm thumb sucking too.  I had their annual report sitting on my desktop ready to read, but I never go around to it.

 

I established a position at 35. This went quite fast.

[bbarberayr]

Worth a read - gives CBI position:

 

 

"Chicago Bridge & Iron executives say their company should not be liable for any part of $247 million worth of penalties Southern Co. CEO Tom Fanning says are due for construction delays at the 2,400-megawatt Plant Vogtle nuclear plant expansion."

 

http://www.bizjournals.com/charlotte/blog/energy/2015/02/cb-i-execs-dispute-liability-for-cost-overruns-at.html?ana=yahoo

[Guest roark33]

CBI is such an interesting situation.  I have struggled with this company since the short report came out and I finally started buying at the open yesterday. 

 

1. You either believe the mgmt is playing fast and loose with the contracts, i.e. bidding on unprofitable contracts and not being frank with the potential liability at the SC nuke plant, in which case this is probably a donut.

 

or

 

2. The cash flows are lumpy, the mgmt did its due diligence on the SC nuke liability before it bought Shaw and the company is still undervalued today, and probably at least $60. 

 

My struggle has been how any outsider can think that they can have enough information on the specific contracts or knowledge of the projects in general to know if CBI is accepting unprofitable contracts.  That just seems outside the realm of possibility.  So, your only choice is trust.  If you have that trust, then you can probably accept that they are going to do about 600m in cash flow in the upcoming year and buy back 10% of their shares over the next two years, while deleveraging and resolving the liability with southern and westinghouse. 

 

The cash flow in Q4 really nudged me towards the side of trust....But, only time will tell.

[mttddd]

CBI is such an interesting situation.  I have struggled with this company since the short report came out and I finally started buying at the open yesterday. 

 

1. You either believe the mgmt is playing fast and loose with the contracts, i.e. bidding on unprofitable contracts and not being frank with the potential liability at the SC nuke plant, in which case this is probably a donut.

 

or

 

2. The cash flows are lumpy, the mgmt did its due diligence on the SC nuke liability before it bought Shaw and the company is still undervalued today, and probably at least $60. 

 

My struggle has been how any outsider can think that they can have enough information on the specific contracts or knowledge of the projects in general to know if CBI is accepting unprofitable contracts.  That just seems outside the realm of possibility.  So, your only choice is trust.  If you have that trust, then you can probably accept that they are going to do about 600m in cash flow in the upcoming year and buy back 10% of their shares over the next two years, while deleveraging and resolving the liability with southern and westinghouse. 

 

The cash flow in Q4 really nudged me towards the side of trust....But, only time will tell.

 

I agree that this really comes down to trust and in particular trusting management. That said its a 100+ year old company, the executives have been around a while and i would argue done a good job, and Buffet has a sizeable stake (obviously he has messed up on management before ala Tesco but he normally gets it right and he has far more resources to understand all of this than i). For me at least the risk reward is good. I was originally in at 45 and bought more when it was hanging around in the mid thirties.

[Valueguy134]

This is definitely a company I follow.    Having worked for a large E&C firm it's not difficult to see what one bad project can do.  After recently graduating I joined up on a really troubled project in a similar sector.  A couple of things I learned was that

 

1. When a project goes side ways, it won't be right sided

2. It truly has a potential to bring down the company given the sheer financial magnitude and complexity (a fear my company had).  At the time our CEO had issued company wide emails mentioning that if someone from my project asks for help, that they are to essentially drop what they are doing to help. 

3. It creates a reputation in the industry, especially in the power sector where the projects are highly levered and delays are detrimental.

4.  What CBI says it's liable for and what it will pay are two completely different things.  To believe that they will walk away would be silly.  Most likely they will be liable for a significant amount more.  Westinghouse is a  partner but more importantly a supplier.  The driver of the project is CBI.

5. The current amount floated for penalties is just a start.  The liabilities most likely take into account power purchases by the client to offset a delay in power production, financial obligations, and costs to bring the project back on somewhat of a schedule (overtime, manpower, expediting).  What they are more likely missing is that with the project being completed near the end of the decade, there will be a lot more delays along with issues once they get into performance testing and commissioning (this is a nuclear project).  To provide some context on how much in liquidated damages we faced, the formula was really (Peak capacity * uptime* $MWh or about $350k per day, and this was just one part of the penalty).

 

This is just my two cents having lived through a similar ordeal for 3 years.  Not to say CBI is going to zero, but with an acquisition the size of Shaw (essentially doubling the size of the company) CBI is no longer the same company you base records on for the last 10 years.  CBI will most likely make FCF overall but you will have to think about how much of it will go towards paying the liabilities and a backstop for the project, and how much of it will go towards growth/shareholders. 

[KCLarkin]

If I can summarize Prescience Point's (PP) short thesis, they believed that:

- the Shaw nuclear contracts were worse than CBI thought

- so CBI setup a $1.5B reserve to 'hide' these losses

- CBIs real 2015E earnings are $4.16

 

So, if we believe PP and not CBI, then the company had a $1.5B reserve that they will be able to tap to cover:

- cost overruns

- liabilities due to schedule delays

- less any cost overruns recoverable from either licensees or westinghouse

 

So unless you believe that losses from these nuclear projects are even worse than the $1.5 B cookie jar that CBI has setup, we can use PP's numbers as a worst case:

 

2015E EPS = 4.16

P/E (FWD) = 11

 

11x seems pretty reasonable for a company growing EPS at 13%.

[RadMan24]

This is definitely a company I follow.    Having worked for a large E&C firm it's not difficult to see what one bad project can do.  After recently graduating I joined up on a really troubled project in a similar sector.  A couple of things I learned was that

 

1. When a project goes side ways, it won't be right sided

2. It truly has a potential to bring down the company given the sheer financial magnitude and complexity (a fear my company had).  At the time our CEO had issued company wide emails mentioning that if someone from my project asks for help, that they are to essentially drop what they are doing to help. 

3. It creates a reputation in the industry, especially in the power sector where the projects are highly levered and delays are detrimental.

4.  What CBI says it's liable for and what it will pay are two completely different things.  To believe that they will walk away would be silly.  Most likely they will be liable for a significant amount more.  Westinghouse is a  partner but more importantly a supplier.  The driver of the project is CBI.

5. The current amount floated for penalties is just a start.  The liabilities most likely take into account power purchases by the client to offset a delay in power production, financial obligations, and costs to bring the project back on somewhat of a schedule (overtime, manpower, expediting).  What they are more likely missing is that with the project being completed near the end of the decade, there will be a lot more delays along with issues once they get into performance testing and commissioning (this is a nuclear project).  To provide some context on how much in liquidated damages we faced, the formula was really (Peak capacity * uptime* $MWh or about $350k per day, and this was just one part of the penalty).

 

This is just my two cents having lived through a similar ordeal for 3 years.  Not to say CBI is going to zero, but with an acquisition the size of Shaw (essentially doubling the size of the company) CBI is no longer the same company you base records on for the last 10 years.  CBI will most likely make FCF overall but you will have to think about how much of it will go towards paying the liabilities and a backstop for the project, and how much of it will go towards growth/shareholders.

 

Thanks for your thoughts.  There are plenty examples of major projects sinking E&C companies.  Surely, it can happen to CB&I.  The Westinghouse and CB&I contract exists and worst case is they split costs 50/50.  What CB&I is liable for is found in the 10k, it's not too hard to find and estimated disputes are there as well.  Also, knowing the root cause of the delays is significant, which has been explained throughout this forum if I'm not mistaken.  The rest of the business, through the LNG projects, fabrication, and technology business provide significant cash flows for CB&I to cover any major liability that comes out of the nuclear project. 

[fareastwarriors]

Nuclear Power Firms Feel Squeeze

 

Cost overruns, delays plague current projects, clouding development of future reactors

 

http://www.wsj.com/articles/nuclear-power-firms-feel-squeeze-1425591380

[valueyoda]

http://finance.yahoo.com/news/cb-reports-strong-2014-fourth-210100635.html

 

Commenting on CB&I's outlook for 2015, Mr. Asherman stated, "We project less than 5 percent of our revenue from new bookings could be affected by timing risks associated with lower oil prices. Accordingly, we think it is prudent to marginally adjust our guidance to revenue of $14.4 billion - $15.2 billion and earnings per share of $5.55 - $6.05."

 

Very nice call by this guy -- I believe he posts here.

 

http://seekingalpha.com/article/2748385-chicago-bridge-and-iron-falls-with-oil-prices-despite-having-virtually-no-oil-exposure

 

It remains one of my biggest positions. However, I am worried that the LNG cycle is peaking and could have an adverse effect on next year's earnings.

[bbarberayr]

I assume this is the cause of today's selloff:

 

http://midlandsbiz.whosonthemove.com/south-carolina-electric-gas-company-requests-update-to-construction-and-capital-cost-schedules-for-new-nuclear-units/

[KCLarkin]

CFO also retiring. Was this expected?

[muscleman]

CFO also retiring. Was this expected?

 

Anyone concerned about this abrupt retiring announcement? I felt like normally companies don't announce a CFO or CEO retiring and then in just 2 weeks he is gone.

I read from the 2013 year end proxy that Ronald A. Ballschmiede is 58 years old. Maybe by now he is 60 and he wanted to retire at 60. That would make some sense, but I still feel like the abrupt announcement and leaving is weird.

Maybe there are some internal control issues and Buffet is quietly pushing for a change?

 

I believe this is the new guy here, but there is not enough info.

https://www.linkedin.com/profile/view?id=151250659&authType=NAME_SEARCH&authToken=Q9Ah&locale=en_US&trk=tyah&trkInfo=idx%3A1-1-1%2CtarId%3A1426259913846%2Ctas%3AMichael+Taff

 

I felt it is pretty abrupt given that the annual shareholder meeting will be held on April 30th, and the current CFO wouldn't stay until then.

 

Any thoughts?

[Guest roark33]

I don't think it is that "abrupt" since they hired a guy from outside--so the search had to be underway for some time.  I think it is a toss-up whether companies announce a CFO is retiring by year's end or they just announce his replacement.  But....who knows.

[muscleman]

I don't think it is that "abrupt" since they hired a guy from outside--so the search had to be underway for some time.  I think it is a toss-up whether companies announce a CFO is retiring by year's end or they just announce his replacement.  But....who knows.

 

Hmm... This explanation makes sense. Thank you!

[MrB]

Not as sanguine. Too young and the position below him was filled on an interim basis.

I think the probability is more than 50% that more related (bad) news will follow.

[mvalue]

I couldn't pull the trigger on this at any point after the CFO missed the major earnings call where they could address the Prescience Point allegations. They said he was sick - fine, but if you are being widely accused of accounting shenanigans as CFO you should probably be on the call even if you are on an IV and can barely get a word out. During that call the CEO also sidestepped any details or information on the issues.

 

Now with the CFO leaving it still feels odd. To longs I admit this is qualitative mush and the real issue facing them is the nuclear construction overruns. It all just makes me feel like I have to miss out on this one even if it works, though.

[MrB]

CB&I, Chiyoda and Zachry Group Awarded Contract for LNG Liquefaction and Export Facility

 

http://www.snl.com/irweblinkx/file.aspx?IID=4234612&FID=28587645

 

[dbuch]

Interesting website a guy on VIC made grades companies based on dividend adjusted book value CAGR and the volatility of that number. CBI scored pretty high.

 

https://dl.dropboxusercontent.com/u/9120212/Updated%20Xray%20Tool%20Output%20Files/index.html

 

https://dl.dropboxusercontent.com/u/9120212/Updated%20Xray%20Tool%20Output%20Files/Grade%20A+%20--%20Chicago_Bridge_&_Iron_Company_N.V.(NYSE~CBI).htm

[muscleman]

Interesting website a guy on VIC made grades companies based on dividend adjusted book value CAGR and the volatility of that number. CBI scored pretty high.

 

https://dl.dropboxusercontent.com/u/9120212/Updated%20Xray%20Tool%20Output%20Files/index.html

 

https://dl.dropboxusercontent.com/u/9120212/Updated%20Xray%20Tool%20Output%20Files/Grade%20A+%20--%20Chicago_Bridge_&_Iron_Company_N.V.(NYSE~CBI).htm

 

I looked at the methodology he uses and don't think very highly of it.

Stable and fast growth of BVPS does not take into account any accounting gimmicks. He should use accounting gimmicks adjusted BVPS.

In addition, this will filter out companies that's making strategic changes, as those will be shown as unstable.

Lastly, Stable and fast growth is pretty much exactly what Wall Street is looking for as well, so it will be unlikely that there is a lot of money left on the table in this game of hunting for Stable and fast growth companies.  :)

 

These comments are irrelevant to CBI though. I bought CBI at $38 and I sold CBI at $45 after the CFO quit. Still biting my thumbs......  ::)

[KCLarkin]

Einhorns letter:

Chicago Bridge & Iron Company (CBI) is an engineering and construction firm with a significant concentration in energy. CBI shares have fallen in sympathy with declining oil prices. We found them attractive at an average price of $42.93, which is less than 8x this year’s expected earnings. While we believe that energy prices may very well stay lower for longer, which might eventually lead to a smaller market opportunity, CBI has a sizable backlog of projects that should support earnings for several years. We also believe that some market participants are overly concerned about costs associated with two nuclear facilities under construction that are likely to be completed late and over budget. While the delays and costs are real, we believe the market is vastly overestimating how much of those costs will be borne by CBI as opposed to its construction partner (Westinghouse) and consumers, who will see it in their energy bills. CBI shares ended the quarter at $49.26.

 

[dcollon]

Some headlines from overnight/this morning that seem to be impacting CBI today. 

 

[Spekulatius]

I don't think it is that "abrupt" since they hired a guy from outside--so the search had to be underway for some time.  I think it is a toss-up whether companies announce a CFO is retiring by year's end or they just announce his replacement.  But....who knows.

 

CFO leaving is worse than the CEO leaving, especially considering the controversy around CBI's accounting. We don't know if there is a fire behind the smoke, but the market has started to discount it somewhat.

[RadMan24]

I don't think it is that "abrupt" since they hired a guy from outside--so the search had to be underway for some time.  I think it is a toss-up whether companies announce a CFO is retiring by year's end or they just announce his replacement.  But....who knows.

 

CFO leaving is worse than the CEO leaving, especially considering the controversy around CBI's accounting. We don't know if there is a fire behind the smoke, but the market has started to discount it somewhat.

 

Disagree.  They seem to hire the guy to increase the cash conversion cycle and become more effiient with their working capital. 

 

I have no problem with the CFO leaving, its a net positive.