Chicago Bridge & Iron Co. NV (CBI, Financial), the $1.4 billion Netherlands-incorporated construction company, delivered its first-quarter 2017 results in May. Chicago Bridge & Iron, or CB&I, delivered a 14.4% year-over-year revenue decline to $1.83 billion and a disappointing 76.9% profit decline to $24.7 million.
As observed, a 10.8% reduction in revenue costs, a 9.7% decline in administrative expenses and more than doubling equity earnings to $7.6 million year over year did not help CB&I improve nor stabilized its profits.
In addition, CB&I provided its adjusted 2017 guidance with revenue between $9.5 billion and $10.5 billion, which is 6.4% lower than the company’s fiscal 2016 performance, and diluted earnings per share (EPS) between $3.50 and $4, which is an improvement from its $3.05 per share loss in fiscal 2016.
Philip K. Asherman, CB&I's president and CEO, further expanded on the company's performance.
"Each of our operating groups reported solid earnings for the quarter with the exception of Engineering and Construction, which was negatively impacted by underperformance on two union construction projects. Overall, new awards exceeded our expectations, indicating the rebound of opportunities in our end markets, specifically in the United States, Middle East and China." Asherman said. Â "I'm especially proud of our outstanding safety record, having performed more than 51 million work hours with zero lost-time incidents in the past six months."
Â
Â
Valuations
CB&I has trailing losses of $395 million, therefore resulting in no trailing price-earnings (P/E) ratio. The company, nonetheless, is trading below its book value at 0.96 times versus the industry median of 1.33 times, and price-sales (P/S) ratio of 0.15 times versus the industry median of 0.67 times (GuruFocus data).
The company also has a trailing dividend yield of 2.12% with 0% payout ratio.
Average 2017 sales and EPS indicated forward multiples of 0.13 times and 3.94 times.
Total returns
CB&I provided 16.9% total losses in the past five years compared to S&P 500’s 15.4% total gains (Morningstar). The company has lost 58% for its shareholders so far this year compared to the index’s 9.9% total gains.
Chicago Bridge & Iron
According to filings, Chicago Bridge & Iron was founded in 1889. The company provides a wide range of services, including conceptual design, technology, engineering, procurement, fabrication, modularization, construction, commissioning, maintenance, program management and environmental services, to customers in the energy infrastructure market. It also provides diversified government services.
In fiscal 2016, CB&I generated 70.7% of its revenue in the United States (10.2% lower revenue than the previous year), 16% in Australia (19.6% lower revenue than in fiscal 2015) and 13% in other countries (41% lower revenue).
CB&I has four divisions: Engineering and construction, fabrication services, technology and capital services.
Engineering and construction
Engineering and construction provides engineering, procurement and construction services for major energy infrastructure facilities.
In the recent quarter, revenue from the division fell 16.6% to $1.28 billion (70% of total company sales), while having delivered a profit margin of 0.4% compared to 7% in the same period last year.
In review, the segment's revenue fell at the same rate, 16.6%, in first-quarter 2016 versus first-quarter 2015. The revenue decline has not stopped in this segment.
Fabrication services
Fabrication services provides fabrication and erection of steel plate structures; fabrication of piping systems and process modules; manufacturing and distribution of pipe and fittings; and engineered products.
In the recent quarter, revenue fell 10% year over year to $478.6 million (26% of total revenue) and delivered a profit margin of 10.9% versus 7% in the same period last year.
According to filings, the division’s improved profitability benefited from lower overhead costs. In review, the segment revenue fell less compared to first-quarter 2016 when it recorded a 18.9% year-over-year decline.
Technology
The technology segment provides proprietary process technology licenses and associated engineering services and catalysts, primarily for the petrochemical and refining industries, and offers process planning and project development services and a comprehensive program of aftermarket support.
In the recent quarter, revenue grew 5.4% to $68 million (3.7% total sales) and reported a profit margin of 31.6% (most profitable segment) compared to 40.5% in the same period last year.
Disposition of capital services
In February 2017, CB&I sold its capital services division for $755 million in cash to Veritas Capital.
In review, the segment contributed 20% or $2.2 billion to CB&I’s fiscal 2016 revenue and generated $592 million in losses. In fiscal years 2014 and 2015, the division averaged a profit margin of 3.4%.
In the recent quarter, segment revenue declined 2.1% to $553 million year over year and generated 3.4% profit margin compared to 2.9% in the same period last year.
Nonetheless, CB&I sold its capital services business at a P/S multiple of 0.35 times its fiscal 2016 business.
Sales and profits
In the past three years, CB&I recorded 1.3% revenue decline and recorded two fiscal years (2015 and 2016) of operational losses (Morningstar).
Cash, debt and book value
As of March, CB&I had $402.3 million in cash and equivalents and $2.4 billion in borrowings. The debt-equity ratio of 1.65 times is higher than the 1.16 times in the same period last year. As observed, the company has been able to reduce its overall debt by $65.7 million while shareholder equity, mostly retained earnings, also fell by $678.7 million.
Of CB&I’s $8.1 billion assets, 37.6% were identified as goodwill and intangible assets. Meanwhile, the company’s book value declined 29% year over year.
Cash flow
In the first quarter, CB&I posted a net cash outflow in its operations of $290.7 million compared to positive cash flow of $141.9 million in the first quarter of fiscal 2016. In addition to lower overall profits, the construction company also experienced higher cash flow reduction in its net receivables, contracts in progress, inventories, payables and other current and non-current liabilities.
Capital expenditures for the quarter were $12.3 million, leaving the company with $303 million in free cash outflow compared to $130.7 million free cash flow year over year. Despite having generated no free cash flow, the company provided $14.4 million in payouts, including dividends and share repurchases, while having issued $3.9 million in shares.
According to filings, CB&I spent $7.4 million on share repurchases in the first quarter, paying an average price of $33.6 per share—148.5% higher than the current share price of $13.52 (at the time of writing).
In fiscal 2016, the company spent $206.6 million on share repurchases for an average price of $35.79 per share—also significantly higher than the current share price.
In the recent quarter, CB&I also took in $257.1 million in borrowings net any repayments while having issued $3.9 million in shares. Over the past three fiscal years, CB&I issued $75 million in borrowings net any repayments.
Conclusion
CB&I sees itself generating positive earnings this fiscal year despite not recording improved operational figures for its recent quarter. The company also sold its capital services segment (20% of total sales in fiscal 2016) at a cheap P/S multiple of 0.35 times to help improve its balance sheet.
Despite this recent activity, CB&I recorded a leveraged balance sheet accompanied by good amounts of blue sky elements (goodwill and intangible assets). In addition, the company also had a patchy free cash flow performance, having maintained its generous payouts to shareholders.
Unfortunately, CB&I also repurchased its shares at high levels compared to the present market price.
Fifteen analysts have an average price target of $28 a share—104.5% higher than the current share price of $13.69. Asking a 40% margin from CB&I’s book value indicated a value of $970.7 million, or $9.63 a share.
In summary, CB&I is a pass.
Disclosure: I do not have shares in any of the companies mentioned.
