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On Dec 27, we reiterated our Neutral recommendation on Chicago Bridge & Iron Company N.V. (CBI - Analyst Report) largely due to its modest third quarter performance. We prefer to remain on the sidelines until we see substantial organic growth and improvement in the overall industry environment.

Why a Neutral Recommendation?

On Oct 30, Chicago Bridge & Iron Company reported third-quarter 2013 adjusted earnings of $121.3 million or $1.12 per share, in line with the Zacks Consensus Estimate. Adjusted net income improved 46.7% year over year on the back of strong project activities during the quarter.

The growth was primarily driven by healthy revenue growth across all the three legacy business units of the company due to rising demand for energy infrastructure, especially in the LNG, gas processing and oil and gas markets across the world. The company’s acquired business units drove the majority of the revenue growth.

In the quarter, all the four segments of the company reported an increase in revenues. The key growth drivers were increased activities in LNG and gas processing work in the Asia-Pacific, robust domestic and international markets, development of shale gas, petrochemical and LNG, increased business in heat transfer, and licensing and new deal wins from both private and public entities.

Recently, the company received a number of new EPC (engineering, procurement and construction) contracts that included a $70 million contract from Saudi Arabia-based Petrofac Co. Ltd for constructing crude oil storage tanks and another $1-billion worth contract from Ingleside Ethylene LLC for the Texas-based ethane cracker project.

The company also received a couple of deals valued at $2.5 billion each in a joint venture with Zachry Industrial, Inc to convert the existing LNG regasification terminal in Freeport, Texas into an LNG liquefaction terminal.

However, the company’s geographically diversified business exposes it significantly to the fluctuations in foreign currencies. In addition, the company is highly exposed to the risks of various external operational hazards including change in political or economic conditions.

Moreover, the company’s weak cash and balance sheet position does not facilitate enough flexibility to make investments and make strategic acquisitions. Its operating cash flow has decreased by more than 240% in the last reported quarter, whereas cash and cash equivalents dipped about 17.1% year over year. Thus, we prefer to remain on the sidelines and maintain our Neutral recommendation on Chicago Bridge & Iron Company.

Other Stocks to Consider

Chicago Bridge & Iron Company currently has a Zacks Rank #3 (Hold). Investors interested in the heavy industries sector can consider VSE Corp. (VSEC - Snapshot Report), Quanta Services, Inc. (PWR - Analyst Report) and ITT Corp (ITT - Analyst Report). While VSE carries a Zacks Rank #1 (Strong Buy), Quanta and ITT both carry a Zacks Rank #2 (Buy).

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