Will Risky Acquisition Pay off for Chicago Bridge & Iron (CBI)?
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Shares of Chicago Bridge & Iron (NYSE: CBI) are active in early trading on Tuesday. An article in Barron's this weekend said shares of the construction company could rise by as much as 50 percent, but that prediction could be a little overzealous, at least in the near term. The stock has declined 4 percent year-to-date, in part due to a $3 billion planned acquisition of Shaw Group (NYSE: SHAW). Following the announcement, shares sold off 14 percent, although they have since recovered and are now trading at $37 per share, $10 below yearly highs.
The deal for Shaw is seen by investors as risky, and this appears to be what triggered the decline in the stock price. However, some are saying the reaction is overdone, and point to CBI's record for managing acquisitions. Some also believe that the acquisition will give Chicago Bridge & Iron a leg up in Shaw's area of specialty, including upgrading coal-fired plants and building nuclear plants. This is in addition to CBI's current area of expertise building infrastructure in the natural gas and oil industry.
Robert Gay, director of research at Global Equity Analytics and Research Service, issued a Buy recommendation on both CB&I and Shaw this summer. He also said that if CB&I can lift Shaw's 6 percent gross profit margin closer to its own 12 percent, the results would be "spectacular."
Here's the rub. While diversity is often times a good thing, CBI appears to be giving up its focus on LNG and going into nuclear and coal, areas loathed by many investors, and while that may not be a problem for the company long-term, especially if they execute, it could remain a problem for the stock, at least for now. In either case, it is a story worth following in the coming days and weeks.
The deal for Shaw is seen by investors as risky, and this appears to be what triggered the decline in the stock price. However, some are saying the reaction is overdone, and point to CBI's record for managing acquisitions. Some also believe that the acquisition will give Chicago Bridge & Iron a leg up in Shaw's area of specialty, including upgrading coal-fired plants and building nuclear plants. This is in addition to CBI's current area of expertise building infrastructure in the natural gas and oil industry.
Robert Gay, director of research at Global Equity Analytics and Research Service, issued a Buy recommendation on both CB&I and Shaw this summer. He also said that if CB&I can lift Shaw's 6 percent gross profit margin closer to its own 12 percent, the results would be "spectacular."
Here's the rub. While diversity is often times a good thing, CBI appears to be giving up its focus on LNG and going into nuclear and coal, areas loathed by many investors, and while that may not be a problem for the company long-term, especially if they execute, it could remain a problem for the stock, at least for now. In either case, it is a story worth following in the coming days and weeks.
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