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Summary

  • Prescience Point did a great job at convincing the general public, but certain points might have been seriously overstated to make a nice profit on its short position.
  • The discussion about CBI is quite pointless; it is a never ending fight between longs and shorts who both have good arguments but no-one knows what will happen next.
  • Buy-ratings from big firms mean nothing; We've all known stocks that were loved by everyone, until they weren't.
  • Berkshire is buying, but Berkshire's book value (+80%) has underperformed the S&P 500 (+128%) during the last 5 years.
  • The conclusion is pretty simple: It all depends on how low/high your standards are and if you want to own shares of a shady company with unreliable management.

A lot has been written about Chicago Bridge & Iron company (NYSE:CBI), and today is the day I will be shining my light on the whole situation.

CBI is righteously being accused of doing some creative accounting by Prescience Point and they have done a great job at convincing the general public.

However, as Berkshire has been raising its position by 30% since the accusations, I believe we can be quite confident about the fact that things aren't as simple as they first seemed. The fact that Berkshire is buying is also not an indication that you should be buying too; The S&P 500 has outperformed Berkshire's book value over the last 5 years by 48%.

The stock fell 30% since the Prescience Point report, and I assume they made a nice profit. By now, chances are pretty high that they covered their position as most people are starting to realize that their analysis was very biased and blew some things out of proportion; putting a $4 billion valuation on a company with a backlog of $30 billion says it all.

And while Prescience Point seemed so be very sure of its short thesis, it might be quite confusing for investors that international analyst firms like UBS and Barclays and others have still high price-targets for the stock and are seeing upsides of 40% or more.

Shares of Chicago Bridge & Iron Company have received a consensus recommendation of "Buy" from the sixteen ratings firms that are covering the stock, Stock Ratings Network.com reports. Two research analysts have rated the stock with a sell recommendation, four have given a hold recommendation, eight have issued a buy recommendation and one has given a strong buy recommendation to the company. The average 12-month target price among analysts that have updated their coverage on the stock in the last year is $84.36.

A number of analysts have recently weighed in on CBI shares. Analysts at Zacks reiterated a "neutral" rating on shares of Chicago Bridge & Iron Company in a research note on Friday, August 8th. They now have a $61.00 price target on the stock. Separately, analysts at Erste Group downgraded shares of Chicago Bridge & Iron Company to a "sell" rating in a research note on Tuesday, August 5th. Finally, analysts at Barclays reiterated an "overweight" rating on shares of Chicago Bridge & Iron Company in a research note on Friday, July 25th. They now have a $87.00 price target on the stock, down previously from $93.00.

The question to be asked of course is how well these firms actually analyze a stock before putting a price target on them. I'm sure we all have known several stocks that went completely in the opposite direction of their oh-so accurate price targets. Lately it is also noticeable that these firms just raise their price target whenever a stock is rising and lower their forecast whenever a stock starts declining. Price targets seem to have become lagging indicators instead of leading ones - which makes them quite useless in my opinion.

Keep also in mind that two firms have given a SELL recommendation and four a HOLD. So are these BUY ratings so meaningful? In this case I belief the consensus is accurate but I just want to point out that investors should not just follow these "ratings" or value them more than they deserve. It should never be your main argument to buy or sell a stock.

Anyways, putting this all aside I feel that the conclusion is pretty simple:

First, it is not up to you to become a GAAP expert. Investors should be getting correct and accurate information at all times from the firms they invested in; something CBI is clearly not providing its investors with.

Secondly, if you want to make an investment in CBI anyway, make sure your position is not too big. As a simple investor you'll never know in time how much of an impact these accusations will have unless it's already to late.

And lastly, these accusations made more than clear that management of CBI made a very 'stupid' acquisition and that it at least has been using some minor "unethical" or even "misleading" accounting principles, who might be legal, but do not really demonstrate the real situation and the true facts shareholder are entitled to know.

And this, ladies and gentleman, is my main reason why I refuse to recommend this stock. Management is clearly not as clean as once presumed and its capability of wisely spending its dollars has also been proven wrong.

When looking at the numbers, the company also gives me the chills:

  • CBI as of today is worth $6.83 billion.
  • Its balance sheet has total assets of $9.3 billion
  • Of which $4.23 billion is goodwill and another is $625 million is been booked as intangible assets.
  • Liabilities stands at $7.05 billion.
  • So Net Asset Value comes in at around $2.3 billion, where almost $5 billion is allocated to goodwill and intangible assets. Take these out, and you'll get the picture.

So the bet is up to you:

  1. Follow Berkshire and take a position, while there is blood running in the streets; or
  2. Simply seek other under-valued stocks and leave this troubled child alone for a while - if not for good - as management is clearly not as experienced and ethical as first presumed.

I prefer the latter.

Source: Q&A: Should I Leave Chicago Bridge & Iron Alone?

Additional disclosure: Check out my website (link next to name) to ask me your own stock-related question. I'll answer every question privately and if your question is considered interesting enough for multiple investors I'll publish it publicly here on Seeking Alpha and/or on my website.