On February 28th, after the market closes, the management team at Chicago Bridge & Iron (CBI) is due to report financial results for the fourth quarter of the company's 2016 fiscal year. Seeing as how I follow the firm a great deal (it's my second-largest as of the time of this writing), I figured that it would be a wise idea for me to lay out not only what analysts seem to be anticipating for the quarter but to also give my thoughts on what I, personally, am expecting from management.
Analysts have low expectations
The picture for CBI is, unfortunately, not looking that great according to analysts but it could be far, far worse. If their estimates are correct regarding sales, for instance, the firm should generate sales during the quarter of approximately $2.72 billion. This would represent a decrease of 16.8% year-over-year. However, this needs to be put into perspective. During the fourth quarter of the company's 2015 fiscal year, the business finally rid itself of is nuclear construction business so sales figures have been depressed largely due to this. In fact, if these sales numbers are accurate, CBI's top line would be in-line with the 15.7% drop seen in the first three quarters of its 2016 fiscal year.
On the bottom line, the picture also looks less appealing but certainly not bad by any means. According to analysts, CBI's earnings per share for the fourth quarter of its 2016 fiscal year should come out to around $1.46. This would represent a decrease of 6.4% compared to the $1.56 per share seen the same time a year earlier. Despite seeing sales drop materially, the company should benefit from stronger sales in its high-margin Technology segment in my opinion.
Expectation #1: Look for reduced costs
Now that I've gone over what analysts seem to be thinking, it's time for me to give my own thoughts on the business and what I am personally keeping an eye out for. First, I expect management to show at least some progress on the company's cost structure. Unfortunately, given the line of business it's in, CBI has small margins by nature but in the third quarter of its 2016 fiscal year, the company's cost of sales came out to 88.2% of revenue, an improvement over the 88.6% the same time a year earlier.
Despite this, total cost of sales for the first three quarters of last year came out to 88.8% of revenue, an increase over the 88.3% seen in 2015. Given the tough energy environment, combined with the nice surprise on costs in the third quarter and management's focus on improving operations in any way possible, I suspect that results for the fourth quarter should also be uplifting. Even though an improvement of 0.4% does not seem like a lot, for a company with sales of $2.72 billion, it would add $10.88 million to the company's pre-tax profit.
Expectation #2: Nice cash flow and some debt reduction
In its third quarter conference call, the company's management team stated that, although they had allocated some cash toward buying back shares, the company's primary objective moving forward (from a cash perspective) is to reduce its debt. In the third quarter alone, the business generated operating cash flow of $176 million and total operating cash flow through the third quarter came out to around $600 million. If management is correct and cash flow approximates 1.7 times earnings like it did for the first three quarters of last year, then operating cash flow of around $208 million should not be unreasonable.
Putting these two items together (a desire to reduce debt, combined with nice positive cash flow), and adding to this the fact that management already has cash on hand totaling $614.97 million, and I would be surprised if the firm did not pay down a sizable amount of debt. Given the uncertainty regarding its dispute with Toshiba (OTCPK:TOSBF)(OTCPK:TOSYY)'s Westinghouse operations, I doubt they will go much lower (if any lower) than their current cash but even allocating around $200 million toward its $2.78 billion in debt would be a great step in the right direction.
Expectation #3: Clarity regarding its legal dispute
As I already mentioned, CBI divested itself of its nuclear construction business during the fourth quarter of its 2015 fiscal year. Since the transaction closed, Westinghouse has come back to argue that CBI owes the firm $2.15 billion in post-closing adjustments while CBI has argued that Westinghouse owes it nearly $428 million. In a prior article, I went over, again, some of the issues associated with the transaction and concluded that Westinghouse has zero merit unless CBI was not negotiating in good faith, but for the markets there seems to be lingering uncertainty.
After Westinghouse alleged how much CBI should pay it, CBI decided to sue the company in order to force it to rely on the language of their agreement in order see who owes who and how much. The court itself would not make a decision but would, instead, force Westinghouse to stay true to the agreement and not try and deviate from it but the court, recognizing (rightfully so) that the arbiter should stay true to the language of the agreement in rendering a verdict, struck CBI's suit down. This was followed up by news that Toshiba is taking a multi-billion dollar writedown and that it's conducting an internal investigation to look at improper controls inside Westinghouse that led to all of this. This should prove to be bullish for CBI in my opinion and I would suspect that, in the conference call at least, management should give an update on these developments since they have otherwise been silent (though investor relations has been open with me about it).
Expectation #4: Sturdy backlog
The last thing I expect for the quarter as a shareholder is to see something favorable with CBI's backlog. In its third quarter, the company surprised me and likely many other shareholders when, after seeing quarter-after-quarter of falling backlog, the business saw this metric rise from $19.64 billion to $19.77 billion (a gain of about $130 million). Given the fact that the energy environment has shown renewed signs of life, I think it's probable that the business will report a further increase in backlog or will, at the very least, see this number stay fairly close to where it is. The likelihood of tumbling backlog appears to be slim at this time unless a major customer pulls out of its plans but I have not seen signs of this happening lately.
Takeaway
Right now, I am bullish regarding CBI and I believe the company offers investors attractive long-term prospects. It is true that the picture right now could certainly be better for the company and I wish that were the case but the fact of the matter is that CBI's strong cash flow, impressive backlog, and overall high-quality operations makes it appealing to me right now and I have no intention of selling anytime soon unless something really bad arises.
