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Baird Downgrades Chicago Bridge & Iron, Sees Lawsuit Overhangs Muting Bull Sentiment

Baird Downgrades Chicago Bridge & Iron, Sees Lawsuit Overhangs Muting Bull Sentiment - Chicago Bridge & Iron Company N.V. NYSE:CBI

Baird downgraded Chicago Bridge & Iron Company N.V. CBI 7.2% to Neutral, citing overhangs related to a lawsuit filed by Westinghouse, its former EPC consortium partner for the U.S. nuclear projects, and fewer fundamental catalysts for the company.

Andrew Wittmann, analyst at the firm, noted that the company filed a lawsuit related to disputed purchase price provisions of last year's nuclear divestiture agreement with Westinghouse. While noting that Westinghouse is challenging the core premise of the deal, the analyst is of the view that its claim is without merit.

The contention, according to Baird, is that Westinghouse is claiming retroactively that Chicago Bridge & Iron owes it $2 billion, as the agreed upon working capital level was set too high, while Chicago Bridge & Iron is demanding $428 million from Westinghouse for the work completed prior to the closing.

Baird noted that its previous upgrade was based on expectations of short-term recovery from weak sentiment, potential for improved free cash flow and better-than-average near-term award prospects/earnings visibility. However, since the upgrade, the firm pointed that there has been an improvement in free cash flow, dwindling of short interest and a slippage in project opportunity. Added to these, the litigation is expected to bring back the overhang and put a lid on stock price.

Consequently, Baird prefers moving to the sidelines until better clarity emerges. Despite positives such as discounted valuation and cash flow-led deleveraging, the firm noted that there are fewer catalysts and several fixed price construction contracts are nearing completion. While lowering its rating on the shares of Chicago Bridge & Iron to Neutral from Outperform, Baird its price target at $40.

At time of writing, Chicago Bridge & Iron was seen trading down 7.02 percent on the day at $36.03.

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DateFirmActionFromTo
Jul 2016BairdDowngradesBuyNeutral
May 2016Johnson RiceUpgradesAccumulateBuy
Apr 2016JP MorganMaintainsOverweight

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