Author Topic: CBI - Chicago Bridge & Iron  (Read 154979 times)

Aberhound

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CBI - Chicago Bridge & Iron
« on: July 25, 2014, 01:20:49 PM »
BRK owns 9% and the stock is down because of this short seller report. The analysis is worth reviewing for its lessons and cleverly uses Buffett's own writing to support the short analysis. It looks like a pick of one of the new hires. Did he miss something in 2013 when he bought or added?

http://seekingalpha.com/article/2272133-chicago-bridge-and-iron-acquisition-accounting-shenanigans-dramatically-inflate-profitability-prescience-point-initiates-at-strong-sell

Yes a premium of over 70% when buying Shaw may be overpaying and fixed price construction projects are extremely risky. But the company enjoys massive tailwinds due to cheap natural gas in the US. Buying a cyclical late in a cycle is risky look how low the share price got in 2008! This could get very interesting particularly if you are bullish on the US energy sector as I am.


topofeaturellc

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Re: CBI - Chicago Bridge & Iron
« Reply #1 on: July 25, 2014, 04:01:13 PM »
Shaw was one of those companies where there were always rumors of aggressive pricing, aggressive accounting, and a promotional management team. I have no idea how true they were.  I'm actually surprised it took one of the short selling outfits this long to target CBI post-deal

E&C companies usually take a while to right things if they have these sorts of issues in their back book.  Not to mention the negative NWC nature of these things can make it really ugly while that happens. 

At the same time there is a reason why these businesses are accounted for the way they are. So the "But Cash Flow is totally different from the P&L" argument is not always as smart as it sounds.

I just think its pretty much impossible to underwrite if shenanigans are really going on with the Accruals, unless its something just hideously obvious.

But these things can go out of business in a flash.   Even with Balance Sheets that look OK. 

And frankly, even if you think earnings are real, this thing ain't that cheap on a trailing basis.

IDK - I'd be more inclined to look at it if earnings were really depressed and they'd already taken a bunch of charges for the back book. 

Palantir

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Re: CBI - Chicago Bridge & Iron
« Reply #2 on: July 25, 2014, 04:02:44 PM »
I am unclear, are you looking at this as a long or a short?
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topofeaturellc

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Re: CBI - Chicago Bridge & Iron
« Reply #3 on: July 25, 2014, 04:04:38 PM »
I interpreted OP as a Long.  I'm not looking at it unless it really blows up.

PatientCheetah

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Re: CBI - Chicago Bridge & Iron
« Reply #4 on: July 25, 2014, 05:58:05 PM »
I read the short's presentation. I think the truth is somewhere in between. What do you guys think of its real earnings power?
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topofeaturellc

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Re: CBI - Chicago Bridge & Iron
« Reply #5 on: July 26, 2014, 05:45:29 AM »
I struggle to come up with a way to figure that out if you don't trust the accounting.

Maybe something like the last ten years CFO backing out prepayment growth? If I could buy it on a really nice yield on that and I thought they could survive needing to convert a bunch of current liabilities to debt at a time of stress  - it might be interesting?   Hard question.  The negative NWC nature of the biz automatically reduces a lot of the margin of safety.

If you want to see what can happen to businesses like this take a look at Maire Technimont - which had a bunch of contracts go bad that ended up costing them multiple years of EBIT, or Royal Imtech - which was an accounting scandal at a national subsidiary level (actually read the forensic report they've got on that. Its kind of awesome). Both of them ended requiring rescue equity offerings despite B/S ratios that looked pretty solid pre-problems. MT was net cash when they announced the first problems.
« Last Edit: July 26, 2014, 05:48:04 AM by topofeaturellc »

HWWProject

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Re: CBI - Chicago Bridge & Iron
« Reply #6 on: October 27, 2014, 04:49:57 PM »
Thought I'd start a discussion on CBI for this group.  I recently purchased CBI at $45 per share and recommend keeping an eye on it. 

Summary

   * Warren Buffett's Berkshire Hathaway keeps buying more of Chicago Bridge & Iron, and now owns nearly 10% of the company.
   * CBI stock has fallen nearly 50% this year, along with falling oil prices and a short-thesis article this summer.
   * My calculation of Intrinsic Value shows now is the time to join Buffett for a long-term play in the energy sector.

Link to SA article:  http://seekingalpha.com/article/2572105-chicago-bridge-and-iron-an-excellent-long-term-buy-in-the-energy-sector

CBI covers the entire energy infrastructure sector, but has been under pressure due to falling oil prices.  I believe now is a great opportunity to enter below Berkshire's buying price.

« Last Edit: October 27, 2014, 06:53:20 PM by Parsad »
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ZenaidaMacroura

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Re: CBI - Chicago Bridge & Iron
« Reply #7 on: October 27, 2014, 06:17:58 PM »
This is interesting - they bought a company called Lummus that designs cracking furnaces for ethane ->ethylene processes.  I think cracking capacity is expanding at breakneck pace - not sure how significant that is to the bottom line but my company has a few large projects in the works that use their SRT furnaces...

handycap5

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Re: CBI - Chicago Bridge & Iron
« Reply #8 on: October 27, 2014, 06:46:26 PM »
a conversation on CBI requires rebuttal of the short thesis: http://www.presciencepoint.com/uncategorized/chicago-bridge-and-iron-june-17-2014/

I think it is overstated, but it did give me pause. But the accounting in this industry seems to be analogous to insurance, where the income statements (and now balance sheets with the M&A) are have a lot of discretion over the short and medium term. Management credibility is important. I was surprised the company's response was an ad hominem attack without substantive rebuttals. Nor was the conference call informative. 

I assume Todd likes it, but can someone explain why it shouldn't just go in the "too hard" pile? Why not buy JEC instead, Ruane has made it a small position?

i look forward to learning from your thinking...

HWWProject

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Re: CBI - Chicago Bridge & Iron
« Reply #9 on: October 29, 2014, 11:34:20 AM »
Short-thesis articles on SA always give me some concern, but then again I haven't found it useful to dive too deep into them either.  Perhaps that's wrong but SA is fertile ground for pump-and-dump schemes.  I'll offer two notes:

1) Berkshire Hathaway increased its ownership of CBI this summer when the price fell as a reaction to this article.  They now own near 10% of CBI.  I can see CBI being a buyout candidate by Berkshire.

2) Herb Greenberg of TheStreet.com said the following in his June 18, 2014 article (with regards to the short-thesis):

"Ken Hackel, of CT Capital, who wrote the book, "Security Valuation and Risk Analysis" -- and who also does detailed accounting work, and goes long and short stocks -- sent out a note this morning that said:

    CBI was a stock we recommended until last fall and are familiar with its accounting. The stock more than doubled for us.

    I believe the short seller does not have a clear understanding of CBI's 'contract capital' account which does indeed fluctuate greatly and is related to the need for working capital (as well as payments) on projects. Large projects are especially vulnerable.   I don't always agree with Ken, but he does know his accounting and I have a history with him being significantly more right than wrong."

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