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Chicago Bridge & Iron Closes Capital Services Unit Sale

Chicago Bridge & Iron Company N.V. CBI recently announced the completion of the divesture of its Capital Services business which was announced in February. The buyer, an affiliate of private equity firm Veritas Capital, has settled for an amended price of $700 million, lower than the initial offer of $755 million.

Cut in the Sale Price

The lower than bargained price for the deal is likely to upset a sizable number of investors. Working capital adjustments and transaction costs will further lower the net proceeds to $650 million. Also, the downward revision of the sales price will cause the company to incur an additional non-cash pre-tax charge of roughly $50 million in the second quarter of 2017.

Despite the drop in the selling price, Chicago Bridge and Iron is upbeat that this divesture will help it slash leverage, lower interest costs and realize cost synergies. The sale is part of the company’s efforts to realign its business with its long-term strategy, which has been designed to generate significant cash proceeds and reduce outstanding debt.

Chicago Bridge & Iron has been grabbing headlines since the past week, following the favorable decision by Delaware Supreme Court in relation to a $2-billion lawsuit connected to Westinghouse acquisition.

Headwinds Galore

Despite the few positive developments in recent times, the engineering, procurement and construction behemoth continues to grapple with a host of issues. Over the past six months, Chicago Bridge & Iron’s shares have lost 41.3%, way wider than the average loss of 7.1% of the Zacks classified Building-Heavy Construction industry.

Like most other companies operating in the energy domain (particularly oil and gas sector), volatility in commodity pricing continues to be a major drag for Chicago Bridge & Iron. Over the past few quarters, the company has been witnessing a precipitous decline in capital investments, severely marring its financials. Concurrent with its first-quarter 2017 results, the company has revised its guidance downward from $4.00–$4.60 per share to $3.50–$4.00, signaling dimmer prospects.

The company’s Zacks Consensus Estimate for full-year 2017 earnings continues to decline, reflecting bearish analyst sentiments. Chicago Bridge & Iron has seen six downward estimate revisions compared with none upward over the past couple of months. This has led the Zacks Consensus Estimate for 2017 to move down from $4.15 to $3.33, underlining a decline of 17.8%.

Taking into consideration the lackluster guidance, downward estimate revisions and reduced federal investments, we believe the Zacks Rank #5 (Strong Sell) company will continue to lose ground, at least in the near term.

Stocks to Consider

Some better-ranked stocks in the broader sector include TopBuild Corp. BLD, Thor Industries, Inc. THO and NVR, Inc. NVR. While TopBuild sports a Zacks Rank #1(Strong Buy), Thor Industries and  NVR carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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

With three beats over the trailing four quarters, Thor Industries has an average positive surprise of 11.6%.

NVR has an average positive surprise of 3.7%, having beaten estimates twice over the trailing four quarters.

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