Shares of Chicago Bridge & Iron (NYSE:CBI) fell more 8% on July 22nd before closing down 7.2% for the day, due largely to a downgrade. In what follows, I will dig into the company a bit and discuss what the decline in share price means for investors at the moment and how I am personally approaching the decline moving forward.
In search for news
After seeing shares of CBI fall earlier in the day, first around 4% before scaling up the losses dramatically on higher-than-normal volume, I decided to search around for news related to the business but came up fairly short.
In addition to searching investor relations and the SEC's EDGAR Database, I looked for information regarding Ecopetrol (NYSE:EC), one of CBI's customers. Earlier this year, Ecopetrol decided to sue (though it's really an arbitration) CBI for $2 billion due to around $4 billion in cost overruns associated with its Reficar facility in Colombia. After finding no initial news that would warrant CBI's drop from other sources, I thought that, perhaps, some negative news may have been released on that end. Interestingly, after searching Ecopetrol's site, and after searching the website for the International Chamber of Commerce, which is handling the arbitration proceedings, I noticed no news regarding CBI was present. Even if I were missing something on that end, shares of Ecopetrol would be expected to rise meaningfully on any such news but they are currently down 0.5%.
The only other news I could find that may be relevant came from Samsung Heavy Industries. According to the firm, it is likely to receive part of a $5.4 billion contract (its own share being around $2.5 billion) as part of a consortium of other firms for the construction of a floating LNG platform in Mozambique. Previously, Anadarko Petroleum (NYSE:APC) had announced CBI as one of its partners in building an LNG facility in Mozambique, so perhaps investors were hopeful that a similar arrangement would take place with the platform, but this seems speculative to me.
There was only one piece of material news for the day and that came from Robert W. Baird. The firm just downgraded CBI from "outperform" to "neutral", dropping its price target down from $45 per share to $40 per share. Part of this drop is due to the fact that CBI is now being sued by (and is countersuing against) Westinghouse, to which it sold its nuclear construction business last year, for $2 billion (with CBI claiming it is actually owed $428 million associated with the deal). Although this is disappointing, relying on analysts' share price forecasts is generally not considered a great way to make money. Regarding the lawsuit, Deutsche Bank (NYSE:DB) seems to think that CBI has a good basis to defend themselves and that it will likely just serve as an "overhang" for the business until settled.
Could there be other contributors to the drop?
Shares of a public company should only trade meaningfully higher or lower on any given day when either 1) material news is made public about the company, 2) a major player is buying or selling shares, or 3) a major shift is taking place in that company's industry. So far, we've established that the first point here does not appear to hold with the exception of the news regarding Robert W. Baird. I also searched regulatory filings for Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B), Appaloosa Management, and Greenlight Capital. In the past, these three firms have held stakes in CBI but I have noticed no recent filings that would indicate any movement here with regards to the company. In fact, during the first quarter of this year (I do not have more recent data), 60 funds bought a stake in the business (compared to 45 that sold), and 147 increased their existing stake (versus 134 that decreased).
This really only leaves the third option. Data on the energy construction industry can be extremely volatile from year-to-year (and no material news that I could find covering the past 24 hours should explain such a drop) but one thing that may be a positive for CBI is news from Schlumberger (NYSE:SLB) that the oil market likely bottomed already and that better times are ahead. It, along with Halliburton (NYSE:HAL), have seen an improvement in the oil industry already and, while CBI has little direct exposure to oil specifically, the news is likely to be positive for other energy categories like LNG, which CBI does have a tremendous amount of exposure to.
Based on what I could find, it seems that none of these three options can adequately explain CBI's decline in share price. There is a fourth option, however, that should be considered; that the stock market is inefficient in the short run. With no news that warrants a decline of this magnitude besides, possibly, the downgrade, this seems to make sense, but is the drop itself an overreaction, or is it due to an overreaction on the upside that CBI saw previously? You see, over the past month, shares of the business (using July 21st's closing share price of $38.75) are up 7% and they are actually up 20.5% from the low point that they saw during this one-month timeframe. The increase from the low came after fears of Brexit subsided.
Compared to the S&P 500 (^GSPC) and the Dow Jones Industrial Average (^DJI), the one-month move doesn't seem all that large. While the S&P 500 is up 3.8% during the same timeframe, the Dow Jones has risen 4.1%. From the same low point period seen for CBI's shares over the past month, these indices are up 8.7% and 8.5%, respectively, but it can be argued that an energy infrastructure business, whose health hinges on global economic growth and locking down long-term contracts that may be put on hold or canceled due to economic growth concerns, would have justified a larger decline and a larger increase in the face of Brexit and the subsequent recovery from those fears.
For this reason, I do not have any cause to believe that CBI is justifiably correcting for an overreaction to the upside previously. This is due not only to the one-month share price change that it has seen relative to the market but is also due to the fact that shares of CBI should, in theory, rise at a quicker pace than the overall market. You see, as of the time of this writing, the S&P 500 is being priced at around 25.1 times earnings, which is extremely high (though not the highest we've seen), and the Dow Jones is priced at around 19.4 times earnings.
CBI, on the other hand, is trading for a fraction of the market as a whole. If you take management's forecast at its word for this year, shares are trading (at the 21st's share price) between 6.7 times earnings and 7.8 times earnings this year (no earnings forecasts are provided by management for 2017). Zacks Investment Research, meanwhile, has a price/earnings ratio for CBI of 7.7 times this year and 7.6 times next year, while Yahoo (YHOO), through its Yahoo! Finance site, is placing a price/earnings multiple on CBI of 7.8 times both this year and next year.
Based on all of the data provided, it's clear Mr. Market is incredibly unhappy at the moment but there seems to be no reason why besides a modest rating downgrade and the threat of its lawsuit with Westinghouse. Some might suggest that the drop is due to a previous overreaction to the upside but when you consider the trading multiple of the business, combined with how the overall market is responding, this does not appear to be realistic.
From what I can see, the move lower is also not due to anything industry specific but is due, instead, to an overreaction from market participants driven by the downgrade given by Robert W. Baird and by the lawsuit. However, with strong earnings and cash flow this year, an improving energy market, and backlog of around $21.2 billion, it's hard to not see CBI in a favorable light.
As of the time that this article was submitted for publication, I have not been able to access the court documents filed by CBI in regards to this case. This is due to the fact that the documents are not available without paying a third-party subscriber that keeps track of dockets for the Chancery Court of Delaware. I have filled out the application process and am waiting for the organization to get back to me in regards to pricing (they do not give pricing immediately for some reason). In the meantime, I am searching for a free copy of the filings so that I may write a follow-up piece to this. However, as things stand now, based on Deutsche Bank's stance, the issue does not appear that significant.
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.