CBI - Chicago Bridge & Iron

[MrB]

It is idiotic for Asherman to look back on that transaction without any regrets. If this was your company for the last 5 years and your CEO stood in front of you making such a statement what would your response have been? Add to that the way that he reported results to you then you have to ask the question whether this guy is just trying to fool you or is he fooling himself; the latter is infinitely worse.

 

Maybe we are misinterpreting this acquisition.

 

Denali Investors has a very good reputation. They were Shaw shareholders and opposed the CBI offer because they thought it was low-ball. According to their numbers, the pro-forma (after synergies) price was 3xEBITDA.

 

http://www.prnewswire.com/news-releases/denali-investors-sends-letter-to-the-shaw-group-shaw-board-of-directors-demanding-appropriate-premium-for-shareholders-cbis-offer-is-inadequate-166059636.html

 

This appears to be an acquisition done at distressed prices. So, part of the rationale could be that we are going to buy these bad nuclear contracts and, in exchange, get a big discount on the rest of the business. If you do a SoP, the nuclear business was probably negative and the rest of the business is positive.

 

So to evaluate the acquisition, you need to do a DCF on the 2/3 of Shaw retained against the original purchase price less any cash outflows due to the nuclear contracts. This is pretty hard to do, given the current macro headwinds. But it is likely that this transaction is not the value destroyer it appears to be.

 

The deal was announced on July 30, 2012. CBI is up 12% since the acquisition was announced. FLR is down 0.7%. Fluor has a better dividend though, so it is probably a wash.

 

CBI has performed in-line since the acquisition was announced.

 

The reason why this stock has performed badly lately:

- Market wildly over-reacted on the upside after the acquisition closed AND berkshire bought it

- The entire segment is out of favor due to low commodity prices

- Multiple compressed due to bad nuclear contracts

 

This is not my favorite industry but you get the chance to buy a phenomenal operator at a big discount.

 

Disclosure: No position. I sold after the sale of the nuclear business was announced. Wanted to raise cash but I think this could be building a base for a very nice run.

 

You can get a pretty good idea of the value that was retained sans nuclear if you read the old Shaw AR's and the old Denali presentation (attached) is helpful too, albeit very bullish. 

The missing piece right now to figure it all out is to know how much debt goes with nuclear. We will know soon enough and at that point it will be interesting to see how it all turned out. I agree that the outcome could be very reasonable indeed, but for the CEO to say it was all good is stupid. However, his comments fit with his rhetoric on the nuclear story all along. It has always been pretty good and on the verge of being resolved, until it wasn't .

D-Shaw.pdf

[muscleman]

Why is there a $1.1 bn charge off?

The original Shaw acquisition's power construction sector's annul income is just around $100 m, and that includes gas and coal fired power plants. I wonder how is this $1.1 bn decided.

[RadMan24]

Working capital used at current projects, projected revenue/DCF stream lost from transferring project, they released a couple pro forma statements, gives you an idea of what assets/liabilities were tied up and all

[muscleman]

Working capital used at current projects, projected revenue/DCF stream lost from transferring project, they released a couple pro forma statements, gives you an idea of what assets/liabilities were tied up and all

 

http://www.sec.gov/Archives/edgar/data/1027884/000102788415000250/a20151105ex991earningscall.htm

 

"The $904 million after-tax charge for the quarter relates to the write-down of working capital, primarily unbilled receivables in our contract-in-progress account, also fixed assets, net deferred taxes, and goodwill and intangible asset impairments."

 

The 1.1 bn write down consists of 400 M goodwill impairment, so I bet the remaining 700 m comes from account receivables.

Eventually they will receive 161 M from WestingHouse.

This means they are PAYING over 500 M to get the nuke business transferred to Westinghouse. This seems like a desperate fire sale.

 

So the game is to keep recording earnings from the Nuke business, and then announce the transaction with a 1.1 bn one time expense, hoping that the shareholders will say, this is a one time expense and should be excluded from EPS calculation?

 

I remember they kept saying the Account receivables are good and they expect to eventually collect all of it from WestingHouse.

 

 

[Dalal.Holdings]

The nuclear construction business was certainly a failure and one of the many examples of foolish large acquisitions in the corporate world.

 

Over the past couple of years, CBI management seemed to hint to investors that the negative operating cash flows due to the nuclear projects would eventually turn positive -- hence a significant portion of the the reported EPS in the past couple of years was actually "non-cash" (the company had negative op cash flows). Now, they are writing off a good portion of those "non-cash" earnings they reported the past couple of years.

 

So, essentially the cash flows statement is what should have been believed, not the management derived EPS figures.

 

The acquisition was certainly a blunder by management and they seem to have realized that (CFO left earlier this year). However, with removal of this business, the cash flow potential of CBI seems very attractive going forward--especially at the current share price of CBI.

 

Management ought to be a bit wiser from this error and not do another stupid acquisition, the cash flows going forward should be used to whittle down debt and return cash to shareholders. Asherman should cut the "no regrets" b.s. and admit the mistake after closing of this deal. Makes you appreciate the more frank CEO's like Buffett who actually own up to mistakes.

[muscleman]

The nuclear construction business was certainly a failure and one of the many examples of foolish large acquisitions in the corporate world.

 

Over the past couple of years, CBI management seemed to hint to investors that the negative operating cash flows due to the nuclear projects would eventually turn positive -- hence a significant portion of the the reported EPS in the past couple of years was actually "non-cash" (the company had negative op cash flows). Now, they are writing off a good portion of those "non-cash" earnings they reported the past couple of years.

 

So, essentially the cash flows statement is what should have been believed, not the management derived EPS figures.

 

The acquisition was certainly a blunder by management and they seem to have realized that (CFO left earlier this year). However, with removal of this business, the cash flow potential of CBI seems very attractive going forward--especially at the current share price of CBI.

 

Management ought to be a bit wiser from this error and not do another stupid acquisition, the cash flows going forward should be used to whittle down debt and return cash to shareholders. Asherman should cut the "no regrets" b.s. and admit the mistake after closing of this deal. Makes you appreciate the more frank CEO's like Buffett who actually own up to mistakes.

 

I felt that the management team is very promotional and the CEO even said he feel great, no regret regarding the Shaw acquisition. Back in 2010, I saw something similar with ATPG. Promotional management, large capex. It didn't end up well.

Of course, this company's business fundamental seems stronger than ATPG so it could be different. It is hard to figure out for me.

[Dalal.Holdings]

I felt that the management team is very promotional and the CEO even said he feel great, no regret regarding the Shaw acquisition. Back in 2010, I saw something similar with ATPG. Promotional management, large capex. It didn't end up well.

Of course, this company's business fundamental seems stronger than ATPG so it could be different. It is hard to figure out for me.

 

Most managers in the business world are "self promotional". Few are like Warren Buffett who actually own up to mistakes. It kind of makes sense: their egos can't tolerate it and most would be fired by their boards. It's why they engage in such acquisitions thinking that their numbers/projections will actually work out.

 

The underlying business of CBI is very attractive to us. If Shaw had not been acquired, CBI's stock price would be much higher than it is today. However, management's blunder of acquiring CBI allows us to buy the business at today's heavily discounted price which is favorable for new owners of CBI like us.

[muscleman]

I felt that the management team is very promotional and the CEO even said he feel great, no regret regarding the Shaw acquisition. Back in 2010, I saw something similar with ATPG. Promotional management, large capex. It didn't end up well.

Of course, this company's business fundamental seems stronger than ATPG so it could be different. It is hard to figure out for me.

 

Most managers in the business world are "self promotional". Few are like Warren Buffett who actually own up to mistakes. It kind of makes sense: their egos can't tolerate it and most would be fired by their boards. It's why they engage in such acquisitions thinking that their numbers/projections will actually work out.

 

The underlying business of CBI is very attractive to us. If Shaw had not been acquired, CBI's stock price would be much higher than it is today. However, management's blunder of acquiring CBI allows us to buy the business at today's heavily discounted price which is favorable for new owners of CBI like us.

 

Yeah. I do understand this point. The key question is now that we have seen them being promotional and covering the nuke problems, are there any other additional problems lying ahead?

[RadMan24]

Well...that's why you need a margin of safety! I will say that the going forward business is still pretty good, but the dynamics of the energy industry are topsy turvy, so...don't expect any crazy increase in earnings for a couple of years (and even then its not that expensive)

[Dalal.Holdings]

the dynamics of the energy industry are topsy turvy, so...don't expect any crazy increase in earnings for a couple of years (and even then its not that expensive)

 

We believe that the selling of this stock along with the rest of the energy industry is the classic error of "throwing out the baby with the bathwater".

 

When it comes to oil, we believe that CB&I is a diversified contractor that is competitive in midstream/downstream (ie. not upstream) -- areas that usually benefit when oil prices come down. Recent wins in petrochemicals, LNG export terminals, etc should be evidence enough for that. Overall, our assessment is that the business is built to thrive as long as the need for energy infrastructure exists (ie. largely independent of energy prices), though short term volatility in contracts can occur with rapid changes in the energy landscape. We believe that the market's tossing the baby serves as an exceptional buying opportunity.

 

 

[Picasso]

All the midstream assets are getting killed despite that historical context of a theoretical better environment for them.  This is a cyclical business and it's debatable what part of the cycle we're in, but that can easily turn this into a value trap. 

 

Dalal, how inexpensive do you consider CBI?  I've long wanted to short this stock because I think investors are valuing this on peak cycle earnings but missed my chance even though this isn't the worst price to short at either (IMO).  However I would be interested to know what you think these guys can earn over a full cycle, what part of that cycle we are in, and what the downside on the stock is in your worst case scenario. 

[RadMan24]

the dynamics of the energy industry are topsy turvy, so...don't expect any crazy increase in earnings for a couple of years (and even then its not that expensive)

 

We believe that the selling of this stock along with the rest of the energy industry is the classic error of "throwing out the baby with the bathwater".

 

When it comes to oil, we believe that CB&I is a diversified contractor that is competitive in midstream/downstream (ie. not upstream) -- areas that usually benefit when oil prices come down. Recent wins in petrochemicals, LNG export terminals, etc should be evidence enough for that. Overall, our assessment is that the business is built to thrive as long as the need for energy infrastructure exists (ie. largely independent of energy prices), though short term volatility in contracts can occur with rapid changes in the energy landscape. We believe that the market's tossing the baby serves as an exceptional buying opportunity.

 

I'd argue it is justified for the most part. When oil goes from $110 a barrel to $37, anything with any exposure to this sector, along with its subsectors, are going to feel the burn. Petrochemicals and maintenance contracts are there, yes.

 

The market is more concerned with the final outcome of selling the nuclear business and the going forward rate of churning backlog into revenue, and generating free cash flow to ease the debt load following this sale. Oil prices have caused the work on LNG projects to slow, not cancelled, but work is moving at a snails pace given current market conditions. Of course, this will eventually turn around, but to say the company "being thrown in for no reason" is a little misleading.

 

The oil backlog was 5% pre nuclear sale. That figure will increase, and LNGs will be  significant portion of backlog and revenue going forward.

 

To take a stab at Picasso's question, I would argue that down side scenario has a little protection if the company ever needed to raise cash, and that is because of its technology business--generates $150-200+ million in past, and plans to increase to higher figure in future, is probably fairly valued around $2-2.5B. If earnings decrease short-term, it should be cyclical in nature. OUtlook for this industry they participate in is positive (downstream, catalysts, petrochemicals feedstock). But again, timing of awards to backlog to revenues may increase due to increased levels of uncertainty around the sector.

 

 

[racemize]

and Berkshire has sold out completely.

[Dalal.Holdings]

Dalal, how inexpensive do you consider CBI?  I've long wanted to short this stock because I think investors are valuing this on peak cycle earnings but missed my chance even though this isn't the worst price to short at either (IMO).  However I would be interested to know what you think these guys can earn over a full cycle, what part of that cycle we are in, and what the downside on the stock is in your worst case scenario.

 

You're welcome to try and short this company which you view as cyclical--a global energy infrastructure builder that operates in upstream/midstream/downstream as well as nuclear maintenance and power among other areas. Not to mention a company that works on large projects whose timelines are typically 5 years or so and can sometimes stretch up to a decade (puzzling to us to call this company cyclical).

 

Earnings out yesterday. With disposition of the nuclear business, management expects significant improvement in cash flows: Operating Cash Flows expected to be well north of $550M (the FY NI projection), possibly up to $1B per mgmt conference call last night while CapEx likely <100M. Good luck shorting this at $3.67B market cap.

[Spekulatius]

I like FLR better  They have a history of converting earnings into cash and their balance sheet is bulletproof, den after acquiring substantial new business (Storck) and share buybacks.

[PatientCheetah]

Does CBI break out its technology business's sales and EBITs? Since a large portion of downside protection is coming from this, it would be useful to understand its historical growth rate and full cycle revenue/margin fluctuations.

[100 Shares]

CB&I: A Compelling Opportunity:

 

CB&I is a wonderful business that is not capital intensive, has a moat, and generates high returns on equity capital.

 

CB&I is an E&C company that has sold off due to exposure to the energy space and problems with the Shaw acquisition.

 

While the business is wonderful, management needs to demonstrate redemption: the Shaw acquisition was a major mistake and management benefits are a bit rich (ie. personal aircraft use).

 

We believe that management must be held to a higher standard by the board of directors and shareholders going forward.

 

http://www.lumegroup.com/blog/cbimar16.html

 

Thank you for posting that. I thought it was a very excellent post.

[Valueguy134]

CB&I: A Compelling Opportunity:

 

CB&I is a wonderful business that is not capital intensive, has a moat, and generates high returns on equity capital.

 

CB&I is an E&C company that has sold off due to exposure to the energy space and problems with the Shaw acquisition.

 

While the business is wonderful, management needs to demonstrate redemption: the Shaw acquisition was a major mistake and management benefits are a bit rich (ie. personal aircraft use).

 

We believe that management must be held to a higher standard by the board of directors and shareholders going forward.

 

http://www.lumegroup.com/blog/cbimar16.html

 

This post has nothing to do with the reality of the E&C business, nor does it reflect how an E&C firm operates. I believe whoever wrote the post is looking at this company in isolation and is regurgitating management/Buffet, and I would caution if you are basing your investment off that blog.

 

A wonderful business keeps getting repeated, but there is absolutely no mention of the huge pricing pressures the company faces, competition, and a shrinking market. The project overrun paragraph is just flat wrong. After purchasing Shaw no one really knows how many bombs there are in backlog and it is no longer the same company when comparing historicals.  It's also clear the writer did zero work on reviewing the industry for LNG, petrochem, etc..

 

My suggestion would be to read some reports/transcripts from competitors.... and see how difficult the environment is, what's ahead of them, and then go from there if you still want to invest in this business.

[skanjete]

CB&I: A Compelling Opportunity:

 

CB&I is a wonderful business that is not capital intensive, has a moat, and generates high returns on equity capital.

 

CB&I is an E&C company that has sold off due to exposure to the energy space and problems with the Shaw acquisition.

 

While the business is wonderful, management needs to demonstrate redemption: the Shaw acquisition was a major mistake and management benefits are a bit rich (ie. personal aircraft use).

 

We believe that management must be held to a higher standard by the board of directors and shareholders going forward.

 

http://www.lumegroup.com/blog/cbimar16.html

 

This post has nothing to do with the reality of the E&C business, nor does it reflect how an E&C firm operates. I believe whoever wrote the post is looking at this company in isolation and is regurgitating management/Buffet, and I would caution if you are basing your investment off that blog.

 

A wonderful business keeps getting repeated, but there is absolutely no mention of the huge pricing pressures the company faces, competition, and a shrinking market. The project overrun paragraph is just flat wrong. After purchasing Shaw no one really knows how many bombs there are in backlog and it is no longer the same company when comparing historicals.  It's also clear the writer did zero work on reviewing the industry for LNG, petrochem, etc..

 

My suggestion would be to read some reports/transcripts from competitors.... and see how difficult the environment is, what's ahead of them, and then go from there if you still want to invest in this business.

 

+1

[MrB]

Does CBI break out its technology business's sales and EBITs? Since a large portion of downside protection is coming from this, it would be useful to understand its historical growth rate and full cycle revenue/margin fluctuations.

page 4 https://www.snl.com/IRWebLinkX/file.aspx?iid=4234612&fid=1001198710

Also interesting to look at them pre Shaw, because the business is kind of back to that now. From memory they break out the steel plates/technology in the 10k around those times. 2012 and/or earlier 10Ks

[MrB]

Agree with Valueguy. That post is a bit rosy. Fixed price contracts worries me a lot and how come they are winning so many contracts when the competition is suffering so much. The only logical explanation is their position in tanks, ethylene cracking and pipe induction bending. They can use that as leverage, but that argument is a bit thin too for my liking.

 

 

[Dalal.Holdings]

 

This post has nothing to do with the reality of the E&C business, nor does it reflect how an E&C firm operates. I believe whoever wrote the post is looking at this company in isolation and is regurgitating management/Buffet, and I would caution if you are basing your investment off that blog.

 

A wonderful business keeps getting repeated, but there is absolutely no mention of the huge pricing pressures the company faces, competition, and a shrinking market. The project overrun paragraph is just flat wrong. After purchasing Shaw no one really knows how many bombs there are in backlog and it is no longer the same company when comparing historicals.  It's also clear the writer did zero work on reviewing the industry for LNG, petrochem, etc..

 

My suggestion would be to read some reports/transcripts from competitors.... and see how difficult the environment is, what's ahead of them, and then go from there if you still want to invest in this business.

 

Many vague assertions here..."the overrun paragraph wrong" (specify), "A wonderful business keeps getting repeated" (wut?), "The company faces huge competition" (find one that doesn't), "no one knows how many bombs there are after Shaw" (that's what due diligence is for).

 

This is a contracting firm that generated 20% ROE for a long time. A big drain from Shaw was the nuclear construction biz which has been disposed. A lot of what's left is nuclear maintenance/decomissioning (wide moat opportunities).

 

The firm is projected to generate free cash flow in excess of $500-550M this year.

 

"go read transcripts". We look at opportunities that are out of favor. We don't invest based on current sentiment (we in fact try to do the opposite of current sentiment). Strange, we know. Interesting how foreign that seems on a "value investment board". Ever hear of the concept of Margin of Safety? Explains why VRX was such a popular pick here (when it was multiple times the price it is now--before it went out of favor). Keep that VRX train(wreck) goin... goin.. goin...

[Green King]

"go read transcripts". We look at opportunities that are out of favor. We don't invest based on current sentiment (we in fact try to do the opposite of current sentiment). Strange, we know. Interesting how foreign that seems on a "value investment board". Ever hear of the concept of Margin of Safety? Explains why VRX was such a popular pick here (when it was multiple times the price it is now--before it went out of favor). Keep that VRX train(wreck) goin... goin.. goin...

 

Please read the disposition press release again. It didn't look like a company that is fight back short term sentiment. It looked like the symbolic movement of risk from their balance sheet to that of the acquirer. while still maintaining the actual project risk in the company with contractual obligations. 

 

You should also read the past transcripts. Their free cash flow projections should not be trusted since management doesn't have a recent track record that deserves trust. This has moved my too hard pile after disposition announcement.

[Dalal.Holdings]

Please read the disposition press release again. It didn't look like a company that is fight back short term sentiment. It looked like the symbolic movement of risk from their balance sheet to that of the acquirer. while still maintaining the actual project risk in the company with contractual obligations. 

 

You should also read the past transcripts. Their free cash flow projections should not be trusted since management doesn't have a recent track record that deserves trust. This has moved my too hard pile after disposition announcement.

 

http://www.prnewswire.com/news-releases/cbi-to-sell-nuclear-construction-business-to-westinghouse-300167317.html

 

"Upon closing, WEC will assume full responsibility for all AP1000 nuclear projects and the nuclear integrated services business. CB&I will continue to supply discrete scopes of modules, fabricated pipe and specialty services to WEC on a subcontract basis for the U.S. nuclear projects."

 

"At closing, WEC will assume, and indemnify CB&I for, previous, current and future liabilities associated with the AP1000 nuclear projects. CB&I expects to receive cash payments from WEC of $229 million, of which $161 million is anticipated to be received upon WEC's substantial completion of the nuclear projects and $68 million is anticipated to be received upon the attainment of certain milestones related to CB&I's continued supply of discrete scopes of modules, fabricated pipe and specialty services to WEC on a subcontract basis for the nuclear projects."

 

http://newsroom.fluor.com/press-release/company/fluor-corporation-awarded-contract-westinghouse-electric-company-manage-constr

 

"IRVING, Texas--(BUSINESS WIRE)--Fluor Corporation (NYSE: FLR) announced today that it was awarded two subcontracts by Westinghouse Electric Company to manage the construction workforce at two Westinghouse AP1000® nuclear power plant projects in Georgia and in South Carolina – the first majority-owned and operated by Georgia Power and the second owned and operated by SCANA/Santee Cooper. Fluor booked $5 billion in contracts in the fourth quarter of 2015.

 

As a subcontractor to Westinghouse, the prime engineering, procurement and construction contractor, Fluor will manage the majority of construction labor at Georgia Power’s Plant Vogtle Units 3 & 4 near Waynesboro, Georgia, and at two additional nuclear electric generating units for SCANA/Santee Cooper at the V.C. Summer Nuclear Station in Fairfield County, South Carolina."

 

The recent cash flows were negative predominantly due to the nuclear projects (which are now gone).

 

Pretty clear to us. We are interested in plays that are in most people's "too hard" piles. It's certainly not for the faint hearted.

[Green King]

"At closing, WEC will assume, and indemnify CB&I for, previous, current and future liabilities associated with the AP1000 nuclear projects. CB&I expects to receive cash payments from WEC of $229 million, of which $161 million is anticipated to be received upon WEC's substantial completion of the nuclear projects and $68 million is anticipated to be received upon the attainment of certain milestones related to CB&I's continued supply of discrete scopes of modules, fabricated pipe and specialty services to WEC on a subcontract basis for the nuclear projects."

 

This is how i have read it.

 

also if the assumptions you noted were true. Shouldn't the correct thing to do be "taking the pain". instead of engaging in actions to make short term earnings look good.