CBI - Chicago Bridge & Iron

[xazp]

I'm surprised the company is down on this news too.  It wasn't long ago that people were worried about short-term covenant breaches.  This removes ~33% of their net debt. 

 

Something I haven't really talked about, from the limited information CBI has given us, Capital Services is a negative cash flow division.  They have only given us Q1 information, but it looks like this:

 

Q1 earnings:

2016 +5.5M

2017 +8M

 

Q1 cash flow from operations:

2016  -$11.7M

2017  -$17.5M

 

I don't know if there's seasonality here with the cash flows, and they don't provide full-year numbers that I can see.  But IF capital services is indeed a negative cash flow operation, then good for them for selling off negative cash flow for $650 million. 

 

 

 

 

 

Apparently, the market doesn't care?  That seems really odd.

[valcont]

So a $50m adjustment in the sale price triggers a $160m drop in market cap?? They could've just offered 2.5m shares to Veritas. Wasn't closing this deal a hangover on the price? What else am I missing here?

[RadMan24]

Well, the thing is a lot of info rests on the 2nd Q call and Q - ranging from progress on loss positions, updated cash flow and earnings guidance, updates on Cameron (lng in general) and then the new CEO's take on CBI's current situation and his strategy going forward.

 

It's been a while since there was a quarterly call or filing without a dose of "bad news".

[xazp]

It's been a great week though.  I mean if it had gone $13, $16, $17, $18, $18 you'd probably feel better, but $13, $20, $21, $20, $19 you're probably making more money :). 

 

Anyway, for me this (as with BAC) is a longer-term hold.  The hope is at some point, the company will say they're going to earn $X, and the market believes that number, and the company delivers.  CBI's credibility needs repair more than anything else, and that will take a long time.  Asherman's credibility is terrible.  Even when he tells the truth on Westinghouse everyone assumed he was lying and was about to lose another billion dollars.  But anyway, a new CEO (right now!!) is pretty much a prerequisite to regaining credibility, but it's a slow process, so for me anyway I'll be patient with the stock price. 

 

Guidance and/or Q2 earnings are important, but what's interesting about CBI is that their problem projects should mostly complete in the next 1.5 years.  It sets a not-that-long time horizon for earnings normalization.  And I suspect it will happen sooner - because they can take reserves against the projects and go back to normal earnings the following quarter.  But it requires - and I hope they do - a level of honesty about their problem projects that the company has just not had recently. 

 

For long-term holders, the best outcome is actually one where the stock remains pretty low, CBI de-levers and regains the ability to repurchase stock.  I think they can do around $400 million in FCF, so they could be taking out 20% of the outstanding shares each year if the price stays around $20.  Or said another way, a FCF yield of 20%.

 

There is something surprising about capital services.  The working capital adjustment seems to be pretty negative (between transaction costs and working capital, -$50 million).  Say working capital was -$40M.  What would cause that?  Did it have an awful quarter?  Did CBI gut the company of cash before closing?  That number seems surprisingly high. 

 

[kab60]

I took a position just before the market closed yesterday based on some pretty superficial reading and work, but having spent a bit more time I get a lil' uneasy. These guys suck at capital allocation. They talk about growth and acquisitions as if it's their number #1 objective (after paying down debt a bit with CS sale) even though it almost did them in. "Strategic acquisitions", as they write in their most recent presentation, is just another way of saying we're willing to buy stuff with lil' consideration for the price paid (since it's other folks' money). I like that the new CEO is an engineer and not a salesman like Assman, but I hate that he's found internally. This might end up as my quickest flip. What makes anyone here comfortable about holding this if they keep their guidance and the market rerates it? Don't you worry they'll set more money on fire as soon as they get the chance?

[valcont]

I took a position just before the market closed yesterday based on some pretty superficial reading and work, but having spent a bit more time I get a lil' uneasy. These guys suck at capital allocation. They talk about growth and acquisitions as if it's their number #1 objective (after paying down debt a bit with CS sale) even though it almost did them in. "Strategic acquisitions", as they write in their most recent presentation, is just another way of saying we're willing to buy stuff with lil' consideration for the price paid (since it's other folks' money). I like that the new CEO is an engineer and not a salesman like Assman, but I hate that he's found internally. This might end up as my quickest flip. What makes anyone here comfortable about holding this if they keep their guidance and the market rerates it? Don't you worry they'll set more money on fire as soon as they get the chance?

 

Which acquisition other than the Shaw had been disastrous? Granted Shaw was a terrible acquisition but they also had a string of bad luck. Nuclear was all the rage before the Japanese accident in 2012, the same year they bought Shaw. And then the goodwill cookie jar controversy , the cashflow issue and CFO resignation.

Now Asherman is out of the way , I hope the CEO will focus on what they did best. Engineering with solid underwriting skills. That's the game in fixed price contracts. These are higher margins than the cost reimbursable ones but carries risk of negative working capital (exactly what CBI is dealing today).

I doubt the new CEO will continue with the same strategy. Jacking up earnings/backlogs wouldn't cut it any more. And if their rational for acquisitions is to merely book reserves by consolidating liability than they are out of luck since everyone is razor focussed on cash flows. Just have to wait for his first conference call to get some clarity.

[xazp]

Really good question.  It still irritates me that the company hasn't really come out and said, Shaw was a poor acquisition, we messed up, and we're sorry. 

 

Three answers:

1)  I think a prerequisite to any acquisition has to be, de-levering the balance sheet and getting their stock "currency" up to multiples near peer multiples.  The company trades at a large discount to competitors, and I think that valuation gap has to close before they can acquire anything.  Well if CBI can get close to competitor multiples (I think FLR trades at like 15x earnings?) then that's a really nice gain and sure head on out. 

 

2)  My model for CBI is BAC.  The acquisitive "visionary" Ken Lewis replaced by the boring Brian "mumbles" Moynihan.  Moynihan is (and has) done the hard, boring work of focusing on operations and cutting costs, etc.  Moynihan is there as a reaction to the flashy, "grow grow grow" Lewis.  We don't know how Mullen will lead, but one hopes he focuses on credibility (IMO #1 issue) and operations (#2).  I think it's reasonable to wait a while to see how he's going to lead.

 

3)  Nuclear acquisition obviously a disaster, and capital services poor.  But I love their technology division (Mullen came from there).  I think fabrication is very good too.  These provide moats and competitive advantages for the company.  It's why I think the core (basically what's left of CBI) has a pretty decent business model.  The technology/E&C combination is what used to make Berkshire and Greenlight excited for the company and that is still there.  So I think if they do make an acquisition, you have to judge on the merits of the acquisition itself. 

 

I like "tuck in" acquisitions where for example they could increase their moats (or add capabilities) in technology of fabrication.  Things that increase the moat = good!  Big E&C acquisitions = bad!

 

But at their current valuation, aren't they more likely to be acquired than to acquire?  I mean to me CBI would be highly accretive + bring a moat to any of their large construction peers, at a low low price.

 

 

 

 

I took a position just before the market closed yesterday based on some pretty superficial reading and work, but having spent a bit more time I get a lil' uneasy. These guys suck at capital allocation. They talk about growth and acquisitions as if it's their number #1 objective (after paying down debt a bit with CS sale) even though it almost did them in. "Strategic acquisitions", as they write in their most recent presentation, is just another way of saying we're willing to buy stuff with lil' consideration for the price paid (since it's other folks' money). I like that the new CEO is an engineer and not a salesman like Assman, but I hate that he's found internally. This might end up as my quickest flip. What makes anyone here comfortable about holding this if they keep their guidance and the market rerates it? Don't you worry they'll set more money on fire as soon as they get the chance?

[kab60]

I took a position just before the market closed yesterday based on some pretty superficial reading and work, but having spent a bit more time I get a lil' uneasy. These guys suck at capital allocation. They talk about growth and acquisitions as if it's their number #1 objective (after paying down debt a bit with CS sale) even though it almost did them in. "Strategic acquisitions", as they write in their most recent presentation, is just another way of saying we're willing to buy stuff with lil' consideration for the price paid (since it's other folks' money). I like that the new CEO is an engineer and not a salesman like Assman, but I hate that he's found internally. This might end up as my quickest flip. What makes anyone here comfortable about holding this if they keep their guidance and the market rerates it? Don't you worry they'll set more money on fire as soon as they get the chance?

 

Which acquisition other than the Shaw had been disastrous? Granted Shaw was a terrible acquisition but they also had a string of bad luck. Nuclear was all the rage before the Japanese accident in 2012, the same year they bought Shaw. And then the goodwill cookie jar controversy , the cashflow issue and CFO resignation.

Now Asherman is out of the way , I hope the CEO will focus on what they did best. Engineering with solid underwriting skills. That's the game in fixed price contracts. These are higher margins than the cost reimbursable ones but carries risk of negative working capital (exactly what CBI is dealing today).

I doubt the new CEO will continue with the same strategy. Jacking up earnings/backlogs wouldn't cut it any more. And if their rational for acquisitions is to merely book reserves by consolidating liability than they are out of luck since everyone is razor focussed on cash flows. Just have to wait for his first conference call to get some clarity.

I think Shaw and the way they've handled it since then speaks volumes. When people appear so dishonest, you start worrying whether or not they don't reckon the mess they created, and then it gets really frightening when they keep emphazising acquisitions. The sale of Capital Services doesn't seem very well executed either (they seem to have put themselves in a shitty bargaining positiom). Anyway, it's all in the past. I hope (and think) you're right that things are gonna change. Question is how much more crap they haven't told us about.

[xazp]

So one question with CBI is whether you view the problems as stemming primarily from the Shaw acquisition, or whether the problems stem from risk management (of which Shaw is an example). 

 

If Shaw is mainly the problem, the architects of that disaster are gone, the transaction has basically been unwound.  So while Shaw caused many years of problems, today you buy the stock cheap but with the bad parts of Shaw excised. 

 

If you view risk management as the problem, then you expect cockroaches to pop up periodically, and unfortunately, in a high-revenue, low-margin business this will be one prolonged, frustrating ride down. 

 

--

 

I would note that Mullen started essentially today, and he has a release saying his focuses are:

Balance Sheet

Cost Controls

Risk Management

Increased Innovation and Collaboration

 

He doesn't mention acquisitions or even backlog growth. 

 

I am a little nervous that "Balance sheet" is the top item.  This could be an innocuous statement - use FCF to pay down debt.  Or it could be a dangerous statement - sell off one of their "moats" (like technology) to clean out debt.  That might well pop the stock because I see CBI as worth less than the sum of its parts, but I like the technology/fabrication/E&C combination. 

 

 

I took a position just before the market closed yesterday based on some pretty superficial reading and work, but having spent a bit more time I get a lil' uneasy. These guys suck at capital allocation. They talk about growth and acquisitions as if it's their number #1 objective (after paying down debt a bit with CS sale) even though it almost did them in. "Strategic acquisitions", as they write in their most recent presentation, is just another way of saying we're willing to buy stuff with lil' consideration for the price paid (since it's other folks' money). I like that the new CEO is an engineer and not a salesman like Assman, but I hate that he's found internally. This might end up as my quickest flip. What makes anyone here comfortable about holding this if they keep their guidance and the market rerates it? Don't you worry they'll set more money on fire as soon as they get the chance?

 

Which acquisition other than the Shaw had been disastrous? Granted Shaw was a terrible acquisition but they also had a string of bad luck. Nuclear was all the rage before the Japanese accident in 2012, the same year they bought Shaw. And then the goodwill cookie jar controversy , the cashflow issue and CFO resignation.

Now Asherman is out of the way , I hope the CEO will focus on what they did best. Engineering with solid underwriting skills. That's the game in fixed price contracts. These are higher margins than the cost reimbursable ones but carries risk of negative working capital (exactly what CBI is dealing today).

I doubt the new CEO will continue with the same strategy. Jacking up earnings/backlogs wouldn't cut it any more. And if their rational for acquisitions is to merely book reserves by consolidating liability than they are out of luck since everyone is razor focussed on cash flows. Just have to wait for his first conference call to get some clarity.

I think Shaw and the way they've handled it since then speaks volumes. When people appear so dishonest, you start worrying whether or not they don't reckon the mess they created, and then it gets really frightening when they keep emphazising acquisitions. The sale of Capital Services doesn't seem very well executed either (they seem to have put themselves in a shitty bargaining positiom). Anyway, it's all in the past. I hope (and think) you're right that things are gonna change. Question is how much more crap they haven't told us about.

[kab60]

So one question with CBI is whether you view the problems as stemming primarily from the Shaw acquisition, or whether the problems stem from risk management (of which Shaw is an example). 

 

If Shaw is mainly the problem, the architects of that disaster are gone, the transaction has basically been unwound.  So while Shaw caused many years of problems, today you buy the stock cheap but with the bad parts of Shaw excised. 

 

If you view risk management as the problem, then you expect cockroaches to pop up periodically, and unfortunately, in a high-revenue, low-margin business this will be one prolonged, frustrating ride down. 

 

--

 

I would note that Mullen started essentially today, and he has a release saying his focuses are:

Balance Sheet

Cost Controls

Risk Management

Increased Innovation and Collaboration

 

He doesn't mention acquisitions or even backlog growth. 

 

I am a little nervous that "Balance sheet" is the top item.  This could be an innocuous statement - use FCF to pay down debt.  Or it could be a dangerous statement - sell off one of their "moats" (like technology) to clean out debt.  That might well pop the stock because I see CBI as worth less than the sum of its parts, but I like the technology/fabrication/E&C combination. 

 

 

I took a position just before the market closed yesterday based on some pretty superficial reading and work, but having spent a bit more time I get a lil' uneasy. These guys suck at capital allocation. They talk about growth and acquisitions as if it's their number #1 objective (after paying down debt a bit with CS sale) even though it almost did them in. "Strategic acquisitions", as they write in their most recent presentation, is just another way of saying we're willing to buy stuff with lil' consideration for the price paid (since it's other folks' money). I like that the new CEO is an engineer and not a salesman like Assman, but I hate that he's found internally. This might end up as my quickest flip. What makes anyone here comfortable about holding this if they keep their guidance and the market rerates it? Don't you worry they'll set more money on fire as soon as they get the chance?

 

Which acquisition other than the Shaw had been disastrous? Granted Shaw was a terrible acquisition but they also had a string of bad luck. Nuclear was all the rage before the Japanese accident in 2012, the same year they bought Shaw. And then the goodwill cookie jar controversy , the cashflow issue and CFO resignation.

Now Asherman is out of the way , I hope the CEO will focus on what they did best. Engineering with solid underwriting skills. That's the game in fixed price contracts. These are higher margins than the cost reimbursable ones but carries risk of negative working capital (exactly what CBI is dealing today).

I doubt the new CEO will continue with the same strategy. Jacking up earnings/backlogs wouldn't cut it any more. And if their rational for acquisitions is to merely book reserves by consolidating liability than they are out of luck since everyone is razor focussed on cash flows. Just have to wait for his first conference call to get some clarity.

I think Shaw and the way they've handled it since then speaks volumes. When people appear so dishonest, you start worrying whether or not they don't reckon the mess they created, and then it gets really frightening when they keep emphazising acquisitions. The sale of Capital Services doesn't seem very well executed either (they seem to have put themselves in a shitty bargaining positiom). Anyway, it's all in the past. I hope (and think) you're right that things are gonna change. Question is how much more crap they haven't told us about.

I think it's difficult if not impossible to know as an outsider, and it's espescially difficult when management isn't being honest, so it's a game of probabilities. I think the odds look good, so I've done my betting, I was just wondering/questioning whether or not this is something one can hold for the medium to long term. As in, if things get cleaned up and there's capital to allocate, will they light it on fire. I like the release they just sent out (unlike their latest presentation it doesn't mention acquisitions) and will probably stick around to hear more. Really appreciate your thoughts xazp, I think your intellectual honesty is impressive  (and very often missing - not just at CB&I).

[racemize]

Call me the ever-optimist, but they did have a pretty amazing track record prior to the Shaw acquisition.

 

For what it is worth, I think the comments on balance sheet just mean delevering, but I imagine we will find out on the next call.

[valcont]

So one question with CBI is whether you view the problems as stemming primarily from the Shaw acquisition, or whether the problems stem from risk management (of which Shaw is an example). 

 

If Shaw is mainly the problem, the architects of that disaster are gone, the transaction has basically been unwound.  So while Shaw caused many years of problems, today you buy the stock cheap but with the bad parts of Shaw excised. 

 

If you view risk management as the problem, then you expect cockroaches to pop up periodically, and unfortunately, in a high-revenue, low-margin business this will be one prolonged, frustrating ride down. 

 

--

 

 

I would say it was empire building which always comes at the expense of risk management. As much as I blame Asherman for screwing it up, shareholders have to get off their high horses too. Hindsight is always better but you have to go back to 2011-12 to see what he was trying to do. Oil was $100, US economy was taking off while the rest of the world struggled.Nuclear seemed the cleaner source and the governments were ramping up the investment.So he tried to grow and diversify by going nuclear (no pun).  The economics of nuclear business just got worse after the Japanese accident. So I gave him a pass for the acquisition but the way he lied/suppress/gloss over information in the last few years is inexcusable.

 

Right now there is an honesty discount on this company and the new CEO can bridge that. Tell the shareholders what they don't want to hear. Tell them Cameron is screwed up and will be a big write off. Better to take the hit and earn the good will since no one believes that Cameron LNG is contained anyways. So when the analysts can't trust the management , they just write off the whole damn thing. Just like what they did with the Westinghouse. You can't give them that power.

 

[HJ]

Probably reading too much into it, but he put cost control ahead of risk management.  Does it mean he thinks the contracts are reasonably well written, just the project execution is where the problem is?  Does it then imply that potential losses from existing projects will drain earnings, but not impact business viability longer term? 

 

Probably reading too much into it, but I kind of like the style of the press release. 

[xazp]

The issue with the nukes is a bit tricky to resolve.  It's a long story, 99% in the past, but two things seem important to me:

 

1)  Sometime after bidding, the nuclear regulatory commission required that the reactor be able to withstand a crash of a small airplane into the shield structure - so that a terrorist couldn't rent a plane and cause a nuclear disaster.  Of course this is very expensive, and the owners and the developers and CBI all argued about who should pay those costs.  I tend to think that CBI was not on the hook for those cost overruns (that seems like a clear "change order") but the specifics of that issue are not widely known and it's a bit unfair to blame CBI for that particular "cost overrun." 

 

2)  CBI has said multiple times that Shaw had indemnities against cost overruns at the nuke projects.  The idea was, Toshiba/Westinghouse were trying a new technology out in the U.S., and there were no contractors willing to take on the risk of overruns.  So Shaw received indemnities before they agreed to the project.  We don't know the extent of these indemnities, and, what they would cover.  For example, CBI had cost overruns at their own fabricators who were producing poor quality, and delayed, parts.  Was CBI indemnified from that too?  Westinghouse and CBI clearly disagree over the issue - which was the driving reason for the Westinghouse-Shaw acquisition, and which morphed into these strange "working capital claims."  Without knowing what was indemnified and what was not, it's hard to figure out if CBI took a lot of risk, or if Westinghouse wasn't playing fair.  I don't know.  But it's plausible that CBI was right about the indemnifications the entire time, but that Westinghouse was trying to play dirty about it.

 

 

 

 

 

 

So one question with CBI is whether you view the problems as stemming primarily from the Shaw acquisition, or whether the problems stem from risk management (of which Shaw is an example). 

 

If Shaw is mainly the problem, the architects of that disaster are gone, the transaction has basically been unwound.  So while Shaw caused many years of problems, today you buy the stock cheap but with the bad parts of Shaw excised. 

 

If you view risk management as the problem, then you expect cockroaches to pop up periodically, and unfortunately, in a high-revenue, low-margin business this will be one prolonged, frustrating ride down. 

 

--

 

 

I would say it was empire building which always comes at the expense of risk management. As much as I blame Asherman for screwing it up, shareholders have to get off their high horses too. Hindsight is always better but you have to go back to 2011-12 to see what he was trying to do. Oil was $100, US economy was taking off while the rest of the world struggled.Nuclear seemed the cleaner source and the governments were ramping up the investment.So he tried to grow and diversify by going nuclear (no pun).  The economics of nuclear business just got worse after the Japanese accident. So I gave him a pass for the acquisition but the way he lied/suppress/gloss over information in the last few years is inexcusable.

 

Right now there is an honesty discount on this company and the new CEO can bridge that. Tell the shareholders what they don't want to hear. Tell them Cameron is screwed up and will be a big write off. Better to take the hit and earn the good will since no one believes that Cameron LNG is contained anyways. So when the analysts can't trust the management , they just write off the whole damn thing. Just like what they did with the Westinghouse. You can't give them that power.

[drzola]

Again I will ask;  was CBI @<$15 USD and as low as $13 not close or below assets liquidation value?  :P

[rogermunibond]

Again I will ask;  was CBI @<$15 USD and as low as $13 not close or below assets liquidation value?  :P

 

Not a useful way to model CBI value IMO.  They are asset light, lots of IP, goodwill, and contracts.

[drzola]

Depends on your definition of Asset rogermunibond

Asset;

In financial accounting, an asset is an economic resource. Anything tangible or intangible that can be owned or controlled to produce value and that is held by a company to produce positive economic value is an asset. Simply stated, assets represent value of ownership that can be converted into cash.

I'm a KISS fan as I deal in Complex Repeatable Adaptive bayesian Modeling  ( CRAP ) on a daily basis.

Whadda I know.

 

Cheers.

[Spekulatius]

Probably reading too much into it, but he put cost control ahead of risk management.  Does it mean he thinks the contracts are reasonably well written, just the project execution is where the problem is?  Does it then imply that potential losses from existing projects will drain earnings, but not impact business viability longer term? 

 

Probably reading too much into it, but I kind of like the style of the press release.

 

Those are good and valid questions. I believe that CBI was overearning from 2010-2015 relative to the current normal and we have a change from variable to fixed price contracts in the new normal that adds to the risk. I believe the new management will clean house and the skeletons (if they exist) will be accounted for with the next 10-q. I believe there is quite a bit that will have to get written off ; also keep in mind that a new management has a substantial incentive to get those things behind them.

 

Disclosure- no position

[xazp]

Two comments:

1)  Wouldn't rely on any of the analysts much.  They're just not very good. Which of them predicted any of the cost overruns before CBI announced them?    Which spent any effort analyzing Westinghouse?  Which predicted the stocks' drop before it actually happened?

 

2)  If they acknowledge the remaining skeletons (I hope they do), the question is whether the stock has already over reacted to those skeletons.  The stock is down what $1.5 billion since a couple of months ago?  The only definitive thing is CBI going $75 million below expectations.  So maybe it's pricing in another $1.4 billion of losses?  I will take the "under" on that. 

 

 

 

 

 

 

 

Probably reading too much into it, but he put cost control ahead of risk management.  Does it mean he thinks the contracts are reasonably well written, just the project execution is where the problem is?  Does it then imply that potential losses from existing projects will drain earnings, but not impact business viability longer term? 

 

Probably reading too much into it, but I kind of like the style of the press release.

 

Those are good and valid questions. I believe that CBI was overearning from 2010-2015 relative to the current normal and we have a change from variable to fixed price contracts in the new normal that adds to the risk. I believe the new management will clean house and the skeletons (if they exist) will be accounted for with the next 10-q. I believe there is quite a bit that will have to get written off ; also keep in mind that a new management has a substantial incentive to get those things behind them.

 

Disclosure- no position

[undervalued]

Why is it down 4% today?

[boilermaker75]

Why is it down 4% today?

 

Fear of earnings on Monday?

[racemize]

I think a competitor had poor guidance.

[Picasso]

More issues with Cameron as per the Sempra call

[benhacker]

http://files.shareholder.com/downloads/SRE/2000572736x0x952602/911457B6-324B-4A97-A830-4590E99938B9/Q2-17_Presentation.pdf

 

 

[RadMan24]

CB&I project delay? Nahhhhh

 

Well, there are always two sides to the story. I guarantee it's top of the list heading into the call.