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Chicago Bridge & Iron Plunges After Disastrous Q2, Here’s Why


Chicago Bridge & Iron Company N.V. CBI plunged 26.7% on heavy volume in the regular trading session yesterday, in the wake of its dismal second-quarter2017 operating results, which included a bleak guidance and some desperate measures to counter balance-sheet weakness.

The company plunged to eight-year lows during yesterday’s trading session, following the dreary Q2 results.Investors are abandoning the stock in droves, in light of the miserable guidance and a dividend suspension. The stock has lost 62.3% of its value year to date, much worse than the industry’s decline of 6.9%.

This energy infrastructure services firm was forced to take desperate actions to shore up its financial position after reporting an immense drop in revenue and a huge loss. Let’s discuss the company’s failings, its Q2 numbers, investor reaction and prospective counteractive measures that the company hopes to employ, in detail.

Revenues: Revenue for the second quarter came in at 40.9%, lower than the prior-year quarter on declines across the board, with a particularly weak engineering and construction business. The company’s total backlog also fell 7.5% year over year.

Earnings: The company reported a colossal GAAP loss of $3.02 per share, in stark contrast to the year-ago earnings of $1.09. The effect of the dismal top line trickled down to the bottom line, which was even under more pressure as operating expenses and interest expense both escalated year over year. The company’s margins were deeply affected by a rise in cost in two gas turbine projects and two LNG export facility projects. Interestingly, this is the company’s third consecutive quarter of missing both top- and bottom-line estimates.

Charges & Cost Overruns: A major reason for the bottom-line loss was that the company booked substantial charges (roughly $548 million pretax) in relation to four Engineering projects. Lower-than-expected labor productivity, elevated costs for fabrication, and craft labor, weather-related delays, subcontractor and indirect costs were responsible for the cost overruns.

Of the charges recorded, two gas turbine power projects (an IPL Eagle Valley project in Martinsville, Indiana, and a project for Calpine in York, Pennsylvania) contributed $181 million. This was the third round of substantial cost estimate escalation on these two power projects. Another $367 million was recorded in charges for two U.S. LNG projects — a project in Hackberry, Louisiana, for Cameron LNG, and another project for Freeport LNG in Freeport, TX.

Cash Burn: The company reported operating cash usage of $157 million, which was driven primarily by the net loss. This reflected a startling turnaround from net cash generated from operating activities of $319.3 million in the comparable period last year. Chicago Bridge & Iron’s cash burn is likely to continue as the company faces substantial risk stemming from further project degradation.

Guidance: Concurrent with the earnings report, Chicago Bridge & Iron released new guidance for the remainder of the year. It now expects second-half earnings of $1.00–$1.25 a share on revenues of $3.7–$4.0 billion. Combined with revenues of $3.11 billion in the first-half, the guidance implies 2017 expected sales of $6.81-$7.11 billion — which is well below the previous projection of $9.5-$10.5 billion for the year. Further, after racking up GAAP losses of almost $4 a share in the first half of 2017, there seems to be a slim chance that Chicago Bridge & Iron’s bottom line will be in the green this year.

Dividend Suspension & Balance Sheet Weakness: In a shocking move, the company announced that it would discontinue paying its dividend with immediate effect. Its dividend had carried a yield of nearly 1.75% for the stock and there’s no doubt that this move antagonized investors gravely. Also, the step reflects severe balance-sheet weakness, as the company said that the dividend cut was apparently necessary in order to satisfy creditors and ensure compliance with certain debt covenants at end of June. The suspension of the dividend is expected to result in annual cash savings of $28–$30 million.

Remedial Actions: The company’s new CEO, Patrick Mullen, declared a flurry of measures to address its chronically poor project execution, improve efficiency and strengthen the balance sheet. To unlock hidden value, Chicago Bridge & Iron intends to sell its crown jewel Technology licensing business for roughly $2 billion or more (net proceeds are likely to exceed the company’s entire net debt of about $1.5 billion). The company is also implementing a comprehensive corporate and operating cost-reduction program, which it expects will generate savings of $100 million on an annualized basis.

Estimate revisions: Not surprisingly, the analyst community has also been distinctly bearish on the stock in recent times. Chicago Bridge & Iron’s earnings estimates have moved sharply south in the past 60 days, with the Zacks Consensus Estimate for 2017 earnings plunging from $3.41 to $2.85, on the back of three downward estimate revisions.

Chicago Bridge & Iron Company N.V. Price, Consensus and EPS Surprise

Summing Up

With slumping revenues, bleak guidance, distress sale of a key operating unit and the need for extreme strategic action, we believe that the future looks exceedingly uncertain for Chicago Bridge & Iron.

After the sale of the technology licensing unit, the company’s operations will centre on large-scale engineering, procurement, and construction and fabrication capabilities with dominant positions in petrochemical, refining, and liquefied natural gas end markets.

Now that almost all of the company’s cards are on the table, the major risk for shareholders would be a recurrence of cost overruns or poor execution in the upcoming quarters. Such events could tarnish management's credibility as it pulls out all stops to stabilize operations and reinstate investors’ confidence.

In light of the numerous headwinds that are plaguing the company right now and the miserable analyst outlook for earnings, we have a Zacks Rank #5 (Strong Sell) on Chicago Bridge & Iron.

Stocks to Consider

A few better-ranked stocks in the broader sector include KB Home KBH, EMCOR Group, Inc. EME and Beazer Homes USA, Inc. BZH. While KB Home sports a Zacks Rank #1 (Strong Buy), EMCOR Group and Beazer Homes USA carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

KB Home has a positive average earnings surprise of 12.5% for the last four quarters, having surpassed estimates all through.

EMCOR Group has a strong earnings beat history, having surpassed estimates thrice over the trailing four quarters. It has a positive average surprise of 11.7%.

Beazer Homes USA managed to beat earnings twice over the trailing four quarters. It has an impressive positive average surprise of 103.5%.

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