Chicago Bridge & Iron Wins Westinghouse Dispute, Stock Soars

Delaware Supreme Court ruled in favor of Chicago Bridge & Iron Company N.V. (NYSE:CBI) this Tuesday, in relation to a $2-billion lawsuit connected to Westinghouse Electric Co.’s 2015 acquisition of Chicago Bridge & Iron’s Shaw nuclear construction business.

Chicago Bridge & Iron’s shares skyrocketed after the court’s favorable verdict, soaring 39% in the last trading session — likely their biggest one-day percentage gain ever. The ruling effectively took a $2 billion overhang off Chicago Bridge & Iron, which reported revenues of $2.36 billion for first-quarter 2017.

Westinghouse is the nuclear construction arm of Japan’s Toshiba Corp. Westinghouse filed for Chapter 11 bankruptcy in March this year due to the cost overruns and delays in the business.

The Story Behind the Lawsuit

In 2015, Chicago Bridge & Iron sold its Shaw Group nuclear construction business to Westinghouse. Westinghouse bought Shaw business for nothing up front, however agreed to assume liabilities associated with the nuclear plant projects that Shaw was constructing in partnership with Westinghouse in South Carolina and Georgia.

After the deal closed, Westinghouse noted that there were certain losses that CBI should have included in the project, as well as a non-cash accounting adjustment associated with Chicago Bridge & Iron's purchase of Stone & Webster when it acquired Shaw Group years earlier. Disputing Chicago Bridge & Iron's historical accounting figures, Westinghouse demanded $2.15 billion as compensation from the former. Chicago Bridge & Iron, on the other hand, considered this demand as an attempt to change the deal and said that Westinghouse owed it almost $428 million.

The latest Delaware Supreme Court ruling discarded Westinghouse's accounting claim and with it, the bulk of Westinghouse's justification for seeking an adjustment to the price.

An independent auditor has been appointed to review post-closing adjustments to the deal price.

What it Means for CBI

Chicago Bridge & Iron maintained that realistically, only around $70 million is in dispute, and it would likely be set off against its $428 million claim against Westinghouse. Consequently, it's entirely probable that Chicago Bridge & Iron may end up owing nothing and that Westinghouse may, because of its bankruptcy, not pay anything either.

Without any doubt, the verdict has reduced the risk for Chicago Bridge & Iron, eliminating almost all liability associated with its Westinghouse litigation.

The lawsuit had weighed heavily on the company’s stock, which was down roughly 54% year to date before yesterday’s rally. Concerns about recent net losses and qualms about project delays also had investors on edge. In fact, even after taking yesterday’s jump into account, the share price has declined 41.5% over the past one year, against the Zacks categorized Building Products - Heavy Construction industry’s average gain of 15%.

Volatile commodity pricing and prolonged softness in the energy markets have proven to be major concerns for Chicago Bridge & Iron. Over the past few quarters, the company suffered a precipitous decline in capital investments, severely marring its financials. Reduced activity on the company’s large cost-reimbursable LNG projects in the Asia-Pacific region and winding down of several other E&C projects are other factors that have been denting the company’s growth.

These headwinds were reflected harshly in the company’s latest quarterly numbers, with earnings missing estimates by a colossal 75% and revenues dropping 11% year over year. The Westinghouse lawsuit remained a formidable risk to future profits, considering the huge amount it involved.

We presently have a Zacks Rank #5 (Strong Sell) on the company.

Chicago Bridge & Iron Company N.V. Price and Consensus

Stocks to Consider

Some better-ranked stocks in the broader sector include TopBuild Corp. ( (NYSE:BLD) ), Armstrong World Industries Inc ( (NYSE:AWI) ) and Weyerhaeuser Co. ( (NYSE:WY) ). While TopBuild sports a Zacks Rank #1 (Strong Buy), Armstrong World Industries and Weyerhaeuser carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

TopBuild has a positive average earnings surprise of 6% for the last four quarters, having beaten estimates thrice.

Armstrong World Industries has a decent earnings surprise history, with an average positive surprise of 1.7%, having beaten estimates twice over the trailing four quarters.

Weyerhaeuser has an average positive surprise of 1.3%, beating estimates twice for as many misses over the trailing four quarters.

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