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September 02, 2012 | About:
Faulty Logic? Barron's says…Chicago Bridge and Iron’s (CBI) purchase of Shaw Group will send CBI surging if it goes through or if it doesn’t.

Author Robin Blumenthal‘s headline noted that CBI’s proposed acquisition of rival Shaw Group (SHAW) was seen unfavorably by Wall Street when it was announced on July 30th. The stock immediately plunged from about $41 pre-announcement to under $35.



Ms. Blumenthal disagrees and makes her case that the deal gives CBI 50% upside. She quotes Sterne Agee analyst Michael Dudas as projecting 2013 EPS of $4.20 for CBI if the deal goes through.



Could buying Shaw Group at a 72% premium to its pre-merger price really add dramatically to CBI’s bottom line? Based on the initial reaction of the shares most people didn’t think so. CBI’s actual results from 2002 – 2011 are shown below (source: S&P). Trailing 12-month EPS were $2.77 for the period ended June 30, 2012.



Value Line rates CBI’s ‘earnings predictability’ as being in the lowest 15% of all 1700 companies in their main research universe. Their past decade’s results have been quite cyclical; swinging from nice gains to small profits or even a loss (2008).

Those banking on a big share price gain need to believe that good economic times lie ahead and the ability of CBI to handle the acquisition with aplomb. If both occur the rosy projections for all-time record earnings might come true.

My beef with Barron’s take was in their ‘Bottom Line’ conclusion. After making the case for why completion of the merger with SHAW would add tremendous value they said…



They are saying that CBI will go up 50% because of the merger but also that CBI could ‘rally smartly’ if the deal falls through. Basically, Barrons contends that CBI will go up no matter what happens regarding SHAW. Something does not compute.

Disclosure: No Position

About the author:

Dr. Paul Price
http://www.RealMoneyPro.com
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Rating: 3.4/5 (18 votes)

Comments

AlbertaSunwapta
AlbertaSunwapta - 1 year ago
Sure it computes. Think about it. If the market is mistaken and the merger proves out, the market forgets its fears and errors and revalues the situation upwards. On the other hand, rightly or wrongly if the merger fails, the fears abate and the market restores the pre-announcement valuation.

I love these articles however the market is not a computer, it's a voting machine. As a human you can compute into you calculations human behavior.

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