Chicago Bridge & Iron Downgraded At Jefferies As Bottom-Line Risks Linger

The risks, according to the firm, included turbine cost overruns that persisted for the third straight quarter, with incremental costs coming from LNG.

Accordingly, Jefferies downgraded shares of Jefferies from Buy to Hold and lowered its price target from $35 to $12.

Troubling Cost Overruns

Analysts Martin Englert, Seth Rosenfeld and Alan Spence said cost overruns reemerged totaling $48 million on a pre-tax basis, with the company reporting a second quarter loss of $3.02 per share compared to the consensus earnings estimate of $0.88. The analysts clarified that the two problem gas turbine projects that hindered the last two quarters again impacted the second quarter by $181 million.

Additionally, Jefferies noted that two U.S. LNG projects, namely Cameron and Freeport, resulted in further $367 million charges. Despite the two turbines projects being 69 percent and 86 percent complete and the company taking proper reserves for the third time, the firm thinks they present lingering risk to earnings.

The firm said it is particularly concerned that the LNG projects have a longer time horizon and incremental cost overruns may be more profitable as a result.

See also: Chicago Bridge & Iron Cut In Half In A Month

Higher Risk Contracts

Although the firm believes Chicago Bridge & Iron is taking decisive actions with a planned sale of its technology segment, a $100 million cost reduction plan, a dividend cut as well as several initiatives aimed at improving transparency, culture and risk management, the firm expressed unease at the company remaining committed to higher risk fixed price contracts.

The firm acknowledged that these contracts may be substantially profitable for the vast majority of business. However, the firm said recent overruns indicate that a minority of miscalculations can fully offset successful execution elsewhere.

Jefferies reduced its 2017 bottom-line estimate, including tech, to a loss of $1.77 per share, while it expects earnings, excluding Tech, of $2.30 per share for 2018. This follows the company's revised second half earnings per share guidance of $1 to $1.25 on revenues of $3.7 billion to $4 billion, implying continued margin headwinds.

At time of publication, shares of Chicago Bridge & Iron were down 4.87 percent at $10.65.