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Chicago Bridge & Iron Company Finally Gets A Catalyst To The Upside

Chicago Bridge & Iron Company Finally Gets A Catalyst To The Upside
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After bottoming out at $13.15 on June 21, shares of Chicago Bridge & Iron Company N.V. (NYSE: CBI) was attempting a recovery from the steep decline experienced since late April. News out Tuesday provided just the catalyst the stock was seeking, catapulting it by more than 30 percent.

The Lawsuit That Plotted The Recent Downfall

The stock has been on a broader downtrend since April 2014. The most recent downward trend began on April 27 after Khang & Khang LLP announced a class action lawsuit against the company, alleging that during the Class Period (between Oct. 29, 2013, and Dec.10, 2014), the company made material false and/or misleading statements and/or failed to disclose certain material information.

The information includes the company's role in improperly accounting its goodwill during 2013 to cover losses associated with construction delays and cost overruns on contracts to complete construction on two new nuclear power plants.

Additionally, the complaint alleged the company failed to establish and disclose an appropriate reserve for this liability in its financial statement and that it lacked effective internal controls over financial reporting.

Earnings Accelerate Selloff

From $31.16 on Monday, the stock began moving southward when the lawsuit was made public. The selling wave set in motion by the litigation accelerated following the release of its first quarter results on May 8, which showed that both the top and bottom line missed expectations and the forward outlook was slashed.

The selloff took the stock to a key long-term support around $15, and between June 12 and June 19, it managed to keep above the level. The $15 support was violated on June 20, when it fell about 2.5 percent.

After dropping roughly 12 percent to $13.15 on June 21, the stock began to inch up in the subsequent two sessions.

Favorable Ruling Provides Platform For Rebound

The sharp gains of Tuesday comes amid the news that the Delaware Supreme Court has ruled in favor of Chicago Bridge & Iron in a legal wrangle with Toshiba Corp (USA) (OTC: TOSYY)'s Westinghouse Electric Company over cost overruns at two unfinished nuclear power plants.

Westinghouse bought Chicago Bridge & Iron's Shaw nuclear construction business in 2015, and huge cost overruns on the projects Shaw was building. along with Westinghouse in Georgia and South Carolina. had saddled the latter with debt, forcing it to file for bankruptcy protection.

Contending that Chicago Bridge & Iron's historical accounting practices did not conform to the GAAP, Westinghouse had sought $2 billion from the former as a post-closing adjustment.

The ruling by the Supreme Court reversed an earlier ruling by the court of Chancery on December 5, 2016.

The short interest in the stock is not too high, with the short interest at 11 percent of the float. The number of days to cover the shorted stocks is 2.2. Therefore, the spike seen Tuesday may not have to do with the scramble to cover short interest.

The removal of the legal overhang is primarily responsible for the change in sentiment toward the stock. The stock has clawed back some of the losses seen since the current downtrend and is currently trading at a one-month high.

CBI Chart
Source: Y Charts

However, it would require stock-watching over the next few sessions to gauge whether the catalyst could lead to a sustainable uptrend.

At the time of writing, shares of Chicago Bridge & Iron were up 31.94 percent at $19.

Joel Elconin contributed to the article.

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Image Credit: Screengrab from daily White House press briefing June 27, 2017, DoE Rick Perry discusses nuclear power, Westinghouse.

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