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Chicago Bridge & Iron (CBI) Hit by Weak Spending, Legal Woes

Zacks Equity Research

Engineering, procurement and construction behemoth, Chicago Bridge & Iron Company N.V. CBI started 2017 on a happy note. The company was upbeat about President Trump's “Rebuilding America” program. The stock, which was considered a direct beneficiary of Trump’s infrastructure policies, gained substantially in the three months post election. However, the optimism proved short-lived and the stock soon began to lose ground.

Over the past six months, Chicago Bridge & Iron’s shares have plunged 57.3%, far wider than the average loss of 12.2% recorded by the Zacks classified Building Products-Heavy Construction industry. Last month, the company came up with drab first-quarter 2017 results, wherein its earnings of 24 cents lagged estimates by a whopping 75%.

In addition, the downward guidance revision from $4.00–$4.60 per share to $3.50–$4.00 per share has miffed investors. Given its array of problems, we believe that Chicago Bridge & Iron investors are in for an even bumpier ride. Let’s delve deeper into factors plaguing the company.

Capital Investments Drying Up

Like most other companies operating in the energy domain (particularly oil and gas sector), volatility in commodity pricing continues to be a major drag for Chicago Bridge & Iron’s profitability. Over the past few quarters, the company witnessed a precipitous decline in capital investments, severely marring its financials. 

In general, the hydrocarbon refining, petrochemical and natural gas industries have historically exhibited cyclical trends that expose them to risks related to general downturns in the domestic and international economies. During first-quarter 2017, decreased activity on large cost reimbursable LNG projects in Asia Pacific region, the winding down of several E&C projects and the timing of progress on projects in Fabrication Services group dragged revenues.

The Westinghouse Woes

The long-running Westinghouse dispute is acting as a major headwind. In early 2016, Chicago Bridge & Iron had divested its nuclear construction projects under its subsidiary Stone & Webster, to Westinghouse. The main agenda was to get the Vogtle and VC Summer power plant projects back on schedule. Presently, the firms are involved in a $2 billion dispute over the nuclear power plant cost overruns, which finally led Westinghouse to file for bankruptcy earlier this year.

While Westinghouse claims that Chicago Bridge & Iron owes it a sum of $2 billion, the latter argues that Westinghouse owes it $428 million. It goes without saying that a lot is at stake for the Zacks Rank #5 (Strong Sell) company. The timing and outcome of the ruling will be a crucial factor in determining future its profitability.

Estimates Revised Down

The analysts are showing no favor toward the company at present. The Zacks Consensus Estimate for full-year 2017 earnings continues to decline, reflecting decidedly bearish analyst sentiment. Chicago Bridge & Iron has seen six downward estimate revisions compared with none upward over the past couple of months. This has led the Zacks Consensus Estimate for 2017 to move down from $4.15 to $3.41, underlining a decline of 17.8%.

Bottom Line

Taking into consideration the lackluster guidance, downward estimate revisions and reduced federal investments, Chicago Bridge and Iron’s will continue to slump hard on the bourse, at least in the short-term. Amid prolonged sluggishness in the end markets and intensifying legal bickering, it is hard to tell if the company can stage a comeback anytime soon.

Top Picks

Some top picks in the broader sector include TopBuild Corp. BLD, EMCOR Group, Inc. EME and Weyerhaeuser Co. WY. While TopBuild sports a Zacks Rank #1 (Strong Buy), EMCOR and Weyerhaeuser hold a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

TopBuild has a positive average earnings surprise of 6% for the last four quarters, having beaten estimates three times.

EMCOR has a robust earnings surprise history, with an average positive surprise of 15.5%, having beaten estimates thrice in the trailing four quarters.

Weyerhaeuser has an average positive surprise of 1.3%, beating estimates twice for as many misses over the trailing four quarters.

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