The first drop in May was only a hint of what was to come with Chicago Bridge & Iron (CBI, Financial) and with the company divesting its Technology Group, the market value has been severely damaged. Long-term investors are given an opportunity to buy more at the lower price.
"If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef? Likewise, if you are going to buy a car from time to time but are not an auto manufacturer, should you prefer higher or lower car prices?
"These questions, of course, answer themselves. But now for the final exam: If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period?
"Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the 'hamburgers' they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices."Â – Warren Buffett (Trades, Portfolio) from the 1997 letter to shareholders
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The company’s technology services accounts for just $284 million in sales and over $100 million in EBIT, forcing management to again lower earnings expectations down to between $1.00 and $1.25 for the second half of this year. This is the game of thrones in the capital markets. Companies have to divest to cover debts sometimes after overextending.
It happens
The question at this point is whether CBI will be profitable in the next few years to the extent management hopes, and every analyst is scrambling to determine where that number will fall. It’s definitely not at $4 per share like some people thought just two months ago.
Problematic natural gas plants and the worsening Cameron/Freeport LNG issues led to the company taking one-time charges amounting to $598 million, leading to the loss. Selling off the technology business will protect the franchise with the management expecting proceeds to eliminate its current net debt of $1.5 billion and give it a few hundred million in cash left over. Management also anticipates unrecognized asset value in sale with planned strategic agreement to maintain service of previously CBI-licensed assets.
We’ll see
CBI plans to sell what some consider the crown jewel technology licensing business for roughly $2 billion, which will leave it with the engineering and construction side (based on 2016 numbers) accounting for 71% of its revenue and EBIT of $307 million (52%); and it’ll still retain the fabrication service with revenue of $2.1 billion (25%) and EBIT of $183 million. All in all, over 80% of its earnings will remain, and the company has a solid backlog of projects with new ones on the way.
Aug. 14: CBI was awarded a contract by Tecnicas Reunidas for new product storage tanks that will be part of a clean fuels expansion project at a refinery of Saudi Aramco. The scope of the project includes the engineering, procurement, fabrication and construction of nine flat bottom tanks as well as modifications to numerous existing tanks. This is CBI’s bread and butter.
Once the debt burden is nil, the company can focus on building out new projects at a profit. A fragmented industry and transparent bidding process for many projects does leads to multiple bidders and intense competition, especially during periods of slow project demand. Given its size, reputation and capabilities, CBI remains one of the best options for handling complex, multiyear infrastructure projects.
The order backlog is one of its prime assets, and CB&I’s year-end 2016 backlog is roughly 1.8 times its annual adjusted revenue over the past year, placing it just behind Fluor (FLR, Financial) (2.5 times) and in front of Jacobs Engineering (JEC, Financial) (1.5 times), valued at 5 and 6 times CBI. Fluor trades at 13x, Jacobs at 14x. Say that CBI does sell its Technology arm for $2 billion and earns $1.25 per share in the second half of fiscal 2017 – the stock could be back in the $20 range.
Disclosure: I/we have no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.
