What a difference a week makes! One week ago, construction firm Chicago Bridge & Iron (NYSE: CBI) stock was in the doghouse, down 12% on a questionable downgrade by analysts at Australian bank Macquarie. Today, CB&I stock is up 32.6% as of 12:45 p.m. EDT.
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Examining Macquarie's weird decision to cut Chicago Bridge & Iron's price target for one reason last week, then retract its reason but reiterate its pessimism anyway, I hypothesized that the "pullback in the stock price just might be a good reason to buy." Turns out, that was the right interpretation...but for an altogether surprising reason.
In 2015, Chicago Bridge sold its Shaw Group nuclear construction business to Westinghouse Electric Company -- a division of Toshiba (NASDAQOTH: TOSBF) -- in a deal that has since soured for Westinghouse. Seeking to limit its losses, Westinghouse sued Chicago Bridge, seeking an adjustment to the price it had paid back then, alleging that bad accounting practices at Chicago Bridge had led it to overpay for the Shaw unit, and seeking $2 billion in compensation from Chicago Bridge.
Today, the Delaware Supreme Court threw out Westinghouse's accounting claim, and with it the bulk of Westinghouse's rationale for seeking an adjustment to the price -- removing a big overhang from Chicago Bridge's stock, and allowing the stock price to soar.
This being a court matter, the next logical step would be for Westinghouse to appeal Delaware's ruling. The litigation will probably continue to drag out for some years, followed, ultimately, by the two companies agreeing to settle their dispute. But with the advantage now firmly in Chicago Bridge & Iron's court, you can bet that any settlement will be for a whole lot less than $2 billion -- and it's not out of the question that Chicago Bridge will get some money out of this litigation, as it has cited other reasons for seeking $428 million in extra compensation from Westinghouse.
In short, Chicago Bridge & Iron investors are cheering this news today -- and they're right to do so.
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