Chicago Bridge & Iron | CBI | June 17, 2014

Prescience Point is releasing a new report on Chigago Bridge & Iron (NYSE: CBI). The report reveals how the company has used creative acquisition accounting to conceal losses, resulting in GAAP financial statements divorced from its economic realities. Management has misled shareholders and analysts into believing that nothing is wrong with its Shaw Group acquisition or business.

After acquiring Shaw Group in 2013, CBI made unusual and repeated retroactive adjustments to its purchase price allocation. Doing so enabled CBI to amass a ~$1.56B reserve that can be converted directly into gross profit to offset future costs, thereby inflating profitability, but also resulting in dramatic deterioration of CBI’s earnings quality. In 2013, CBI reported Adj Net Income of $454m, the highest in its history, and CFFO of -113m, the lowest in its history. CBI is struggling with certain Shaw contracts that may prove to be severely loss making, and the reserve is being used to mask their financial impacts and CBI’s increasingly fragile financial condition.
Q1’2014 results confirm our expectations that CBI continues to face headwinds, including continued losses, divergence of earnings and cash flow, and a rising dependency on debt. While the company has $1.35B in revolver availability, we believe CBI will be forced into a goodwill write-down or financial restatement, either of which would trigger debt default, heightening the risk of a liquidity crisis or dilutive equity raise.

Meanwhile, Wall Street analysts are missing the forest for the trees, assuming CBI’s reported financials represent its future and anchoring their projections to CBI guidance and reported Adj EPS, both of which are significantly inflated by non-cash income from the release of the reserve. We believe CBI has presented itself to the investing public in a highly questionable manner and that, as a result, it has been successful in its efforts to inflate its stock price beyond reasonable measure. Based on our analysis, CBI stock is worth ~$37 per share, ~49% below current trading levels.

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