Problem Projects, Cash Burn Weigh On Chicago Bridge & Iron

Revenues were down to $1.3 billion from $2.2 billion, short of the consensus of $2.47 billion. The company also announced a comprehensive cost reduction program and suspended its dividend in a bid to reverse the worsening fundamentals.

The company also lowered its full-year outlook.

Following the release of the results, Deutsche Bank lowered its price target on Chicago Bridge & Iron from $25 to $21. Citing material negatives, including high leverage, cash burn and the uncertainty, Baird lowered its price target for Chicago Bridge & Iron from $24 to $10.

Deutsche Bank has a Buy rating on the shares of the company, while Baird has a Neutral rating.

In reaction to the results, Chicago Bridge & Iron stock was slumping 31.64 percent to $11.17.

Significantly Disappointing Q2

Deutsche Bank analyst Chad Dillard said he is significantly disappointed with the second-quarter results, given the higher than expected cost overruns and lower than expected second half earnings per share guidance.

See also: $15 Could Be An Important Level For Chicago Bridge & Iron Investors

The analyst thinks the management took its medicine from a charge and earnings guidance perspective. This is despite the analyst acknowledging the tough road ahead for the company, as it repairs its credibility and navigates four projects with execution challenges.

Path Toward Unlocking Value Visible

Meanwhile, Deutsche Bank sees a path toward unlocking value through potentially selling the technology business for 120 percent of the company's market value, deleveraging toward 1–1.5 times EBITDA and reducing costs by $100 million annually.

The firm thinks there is a clear path for the company's stock can trade toward the $20 range again if the company can execute on these initiatives and avoid further cost overruns.

Baird Sees Ample Risk

Baird noted that significant project charges and further cash burn prompted the company to take immediate actions to avoid additional balance sheet pressure. Analyst Andrew Whitmann said balance sheet and concerns are back in focus, with ample risk stemming from further project degradation.

The analyst expects the cash burn to continue, as underlying earnings power significantly eroded. To pivot in a more favorable direction, the analyst feels material new awards are warranted.

"Our scenario analysis sees the bull case to the mid-teens, with downside in the low single digits," the analyst said.

Reviewing Chicago Bridge & Iron's second quarter results, Baird said a confluence of CBI factors culminated in the second quarter, sharply elevating the risk profile. The firm noted that the previously problematic natural gas plants and the worsening Cameron/Freeport LNG issues led to the company taking charges amounting to $598 million, leading to the loss.

This, along with additional cash burn, according to the firm, forced the company to take action to further protect its balance sheet. The firm termed the combination of items as worse than the expected bad news.

Baird believes the sale of the technology business could protect the franchise, with the management expecting proceeds to eliminate its current net debt of $1.8 billion. The firm also noted that the management sees unrecognized asset value in sale, with planned strategic agreement to maintain service of previously CBI-licensed assets.

With the revised annualized earnings guidance implying EBITDA in the $325 million range, excluding technology, Baird said mid-to-high teens valuation is defended, with very high risk. This is premised on no further execution challenges and a halt to cash burn.

At last check, shares of CBI were down 32.37 percent at $11.05. ________ Image Credit: By WhisperToMe - Own work, CC0, via Wikimedia Commons