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.
Disclaimer: This research report expresses Prescience Point LLC’s opinions. Use of the research produced by Prescience Point LLC is at your own risk. This is a short-biased report and you should assume the author of this report and its clients and/or investors hold a short position and derivatives tied to the security of Chigago Bridge & Iron, Inc. that will benefit from a decline in the price of the common stock. Following publication of the report, the author (including members, partners, affiliates, employees, and/or consultants) along with its clients and/or investors intend to continue transacting in the securities covered therein, and may be long, short, or neutral at any time hereafter regardless of the initial recommendation. The author of this report has obtained all information contained herein from sources believed to be accurate and reliable and has included references where available and practical. However, such information is presented “as is,” without warranty of any kind– whether express or implied. The author of this report makes no representation, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results to be obtained from its use. Forward looking statement and projections are inherently susceptible to uncertainty and involve many risks (known and unknown) that could cause actual results to differ materially from expected results. All expressions of opinion are subject to change without notice, and the author does not undertake to update or supplement this report or any of the information contained herein. Prescience Point LLC is not a broker/dealer or financial advisor and nothing contained herein should be construed as an offer or solicitation to buy or sell any investment or security mentioned in this report. You should do your own research and due diligence before making any investment decision with respect to securities covered herein, including, but not limited to, the suitability of any transaction to your risk tolerance and investment objectives and consult your own tax, financial and legal experts as warranted. READ THE COMPLETE LEGAL DISCLAIMER CONTAINED IN OUR REPORT.