What's Going On With Chicago Bridge & Iron?

| About: Chicago Bridge (CBI)
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Shares of CBI dipped after the market closed on July 27th in response to a mixed earnings release from management for its second quarter.

While sales and earnings missed expectations, and management lowered forecasts this year, there were a number of positive highlights.

The company generated strong cash flow for the quarter, paid down a nice chunk of debt, and bought back shares.

Even after the revision, shares are still incredibly cheap, making me feel extremely comfortable with the business moving forward and, overall, quite satisfied with the financial report.

Shares of Chicago Bridge & Iron (NYSE:CBI) fell modestly after the market closed on July 27th after news broke that the firm missed analysts' expectations for sales and profits and that it lowered full year results for 2016. In what follows, I will dig into the release and give my own thoughts on what it means for the company as well as what it means for investors in the enterprise moving forward.

CBI missed top and bottom line forecasts

According to management, CBI generated sales for the quarter totaling $2.70 billion. Although this is a nice amount of money to bring in, it was below the $2.82 billion analysts had been forecasting for the business but was slightly higher than the $2.64 billion the firm generated the same quarter last year after stripping out the sales generated by its nuclear construction operations that have since been disposed of.

On the bottom line, CBI saw earnings per share total $1.17, a modest miss compared to the $1.22 in per share earnings forecasted by analysts but a hair above the $1.15 in per share earnings seen the same quarter last year (adjusting for the nuclear business as well, without which earnings last year were $1.55 per share). As sales dropped, management suffered from costs that couldn't scale down as quickly, with the firm's cost of sales rising from 88.1% of revenue to 89.1%, and its selling, general, and administrative costs rising from 2.7% of sales to 3.1%.

At first glance, this looks fairly bad but not terrible by any means. After all, without the nuclear business's operations plaguing the enterprise, its operating cash flow soared. During the quarter, cash flows from operating activities totaled $177.41 million, a meaningful increase over the $95.17 million seen the same period a year ago. This actually was better than the $130 million or so that I had expected the firm to generate and shows that its cash flow position is incredibly healthy.

A look at the bad and good

Beyond these basics, there were some other items that are noteworthy. For starters, management did revise down sales and profits this year. Previously, the company thought that revenue this year would be between $11.4 billion and $12.2 billion. Now, however, that number has been reduced to $10.6 billion and $11 billion, which is disappointing. Management stated that this was due to the fact that some customers are delaying decisions on projects because of the current energy environment. As a result of this decrease, earnings forecasts have been reduced to between $4.70 and $5 per share, down from the $5 to $5.75 range expected earlier in the year.

Beyond this, there wasn't really any bad news that I could spot. Backlog did decrease $1.6 billion during the quarter but at $19.6 billion the number is still quite high and can protect CBI for quite a while. There was actually some pretty good news besides the operating cash flow picture that should be mentioned. One such example of this is the fact that the firm's high-margin Technology segment saw new awards coming in at $107.77 million, an increase over last year's second quarter, which came out to $81.09 million. Although this is not significant in and of itself, management did say that this tends to be a good sign that activity should pick up in the EPC operations, which are material to CBI.

Besides awards, however, the company also saw some decent moves to reduce its debt structure. During the second quarter, CBI's management team paid down $135.27 million in debt, bringing total debt down to $2.34 billion, or about 10% lower than the $2.59 billion seen at the end of 2015. You would think that this kind of move would have a material impact on their cash and cash equivalents but this has not been the case. During the quarter, cash and cash equivalents came out to $602.91 million, a modest decrease from the first quarter's $641.49 million but well above the $550.22 million it stood at in December of 2015. Management also happened to reduce the number of shares outstanding by about 2.11 million units during the quarter.

Even after seeing the revisions provided by management, shares of CBI look incredibly cheap. At the moment, shares of the business are trading at between 7.1 times earnings and 7.6 times earnings, which makes it among the cheapest publicly traded companies that I'm aware of. Management did not update its operating cash flow guidance for the quarter, but even with just six months in we can see that shares are going for 11.7 times for half a year's operating cash flow. If cash flow continues at its current pace for the next two quarters, the trading multiple on the business this year will be just 5.9 times.


What we have here with CBI is actually quite fascinating. Usually when a management team announces bad news (missed sales and earnings, combined with lower forecasts this year), the news is not accompanied by so many positive highlights (strong cash flow, growing Technology segment, share buybacks, debt reduction, continued strong backlog, and a low trading multiple). Overall, only time will tell what happens with CBI but after seeing both the good and bad things reported this quarter, it brings a sense of understanding that things will likely be alright moving forward. Absent fraud or contracts actually being canceled (instead of delayed), it's hard to look at the business and not like what I'm seeing as a whole. Without any doubt there are some unappealing spots right now, but not enough to warrant any concern in my mind.

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.