After the market closes on April 20th, the management team at Chicago Bridge & Iron (NYSE:CBI) is due to report revenue and earnings for the company's first quarter of its 2016 fiscal year. As the largest holding in my firm's portfolio by a nice-sized margin (especially compared to the third-largest holding and below), it's important for me to understand what is expected of the company and to form my own thoughts on the issue. In what follows, I will highlight not only what analysts expect from CBI this quarter but what I personally would like to see as a shareholder whose future is very much tied to the business and its performance.
Analysts have low expectations
For the quarter, analysts don't seem to be expecting all that much from CBI. According to the most recent forecasts available, the business should report sales of about $2.82 billion. There is no denying that this is a significant amount of sales by the standards of any individual, but it's actually meaningfully smaller than what the company reported last year. For the first quarter of CBI's 2015 fiscal year, the company brought in revenue of $3.13 billion. Should analysts be accurate in their forecasts for CBI, this implies that investors shouldn't be surprised to see sales fall by 9.9% year over year.
My own thought on this issue is that a drop in sales must take place, though I do not pretend to understand what level those sales should be. What I do know, however, is that CBI disposed of its nuclear construction business, part of its now-failed Shaw Group acquisition a few years back, last year. This asset sale not only guaranteed that sales would drop (keeping all else the same), but it also resulted in lower backlog.
At the end of 2014, CBI had backlog totaling $30.4 billion, a number that fell, as of the end of last year, to $22.6 billion. Without any doubt, some of this decline can be chalked up to new awards coming on at a slower pace than revenue on current contracts is being realized but the largest part of this drop was an estimated $7.3 billion associated with its sale of its nuclear construction operations.
On the top line, I'd be more inclined to say that analysts are probably more or less right about what the picture should look like for CBI, but I do take issue with their earnings forecast. As of the time of this writing, the current expectation is for CBI to generate earnings per share of about $1.13, down 6.6% from last year's measure of $1.21 per share. My own estimate is that this number could very well be larger after adjusting for non-cash adjustments due to the fact that the company's nuclear construction business was a lag on cash flow, and as a result, likely a lag on earnings.
For instance, CBI saw an operating income margin of just 6.8% in its Engineering & Construction segment, the part of the business that held nuclear construction, in 2014 (it was negative in 2015 due to a non-cash charge), compared to margins of 38.4% and 10%, respectively, in its Technology and Fabrication Services segments. With this problem child gone, I'd say there's an opportunity for a surprise on this front.
What investors should be paying attention to
Heading into earnings, there are some items I think investors should pay careful attention to. First and foremost is the $2 billion lawsuit that CBI was hit with from Ecopetrol (NYSE:EC). After seeing project costs for its Reficar refinery more than double from $3.99 billion as an estimate to $8.01 billion (final cost), Ecopetrol now believes it is entitled to $2 billion from CBI to compensate for damages.
However, as I mentioned in a previous piece, Mr. Market doesn't seem to think this is an issue and the largely state-owned energy business CBI did the work for will not have the homefield advantage since arbitration proceedings are being conducted by an outside organization. My own opinion on this, near term, is that management will provide some details into this new proceeding but I'm not sure how much can be known by the public this early into everything.
Another major move by CBI is that the company recently broke ground on its NET Power demonstration plant, a joint venture between it, 8 Rivers Capital, and Exelon (NYSE:EXC). This project is currently geared toward practically eliminating emissions related to electricity generation in a cost-effective manner by implementing the Allam Cycle and effectively removing the need for traditional steam-heavy facilities that only result in large quantities of wasted energy.
Seeing this as the path to the future, CBI has been investing heavily in the project and investors shouldn't be surprised to see more details (hopefully information on both a more detailed timeline for completion and on any changes to the technology that or investment plans to make it (subject to a successful pilot) more accretive to shareholders).
Finally, I'm also looking closely to see what happens with backlog. Despite seeing a massive downturn in the energy industry, CBI has been largely spared because of the many high-quality projects it is working on in the U.S. (80% of backlog at the end of 2015 was attributable to U.S. projects) and because the company has little direct exposure to oil prices.
In spite of all of this, however, it's very likely that attractive projects are harder to find because of the downturn, which leads me to imagine a picture where the business sees backlog fall not only compared to what was seen in the first quarter of 2015 but also compared to late last year (adjusted, of course, for its nuclear construction divestiture).
With earnings practically here, investors should think very carefully about what they expect from CBI and what the picture for the company could realistically look like. Personally, I have no idea about sales but I do think a case could be made for stronger than expected earnings. Furthermore, I believe it's not unreasonable to anticipate some important announcements regarding its recent legal issues, its NET Power endeavor, and about shrinking backlog. Ultimately, unless I see something really bad, I intend to continue holding my stake in CBI but investors who are uncomfortable with this uncertainty cannot be blamed for selling out ahead of time.
Disclosure: I am/we are long CBI.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.