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Here's Why Investors Should Hold on to KBR Stock Right Now

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KBR, Inc. (KBR - Free Report) is expected to gain from the solid prospects of the Government Solutions (“GS”) business. A growing backlog level is adding to the positives. So far this year, shares of KBR have gained 28.4%, almost in line with the Zacks Engineering - R and D Services industry’s 28.2% rise.

However, intense competition, volatility of commodity prices and uncertainty in the global market remain potent headwinds.

Major Growth Drivers

Contribution From GS Business: GS business is one of the major contributing units of KBR. The business has been riding on on-contract growth in logistics and engineering, take-away wins alongside new work awarded under the company’s portfolio of well-positioned contracting vehicles.

Robust contribution from KBR’s overseas logistics and mission support programs on the back of higher military exercise activities, increased outsourcing of sustainment activities by the military and the ramp up of the new wins led to the growth. Notably, higher tasking for various missile defense and other military priorities in its engineering business areas, under select IDIQ contracts, are major positives. The company anticipates strong growth across all key markets in the United States, the UK and Australia, that is primarily attributable to continued opportunities across the project’s lifecycle. KBR’s 2021 guidance includes roughly $200 million in expected 2021 revenues from Middle East contingency operations.

Robust Backlog: KBR’s robust backlog level of $19.34 billion (as of Mar 31, 2021) indicates substantial opportunities in the upcoming quarters. Notably, nearly 84% of the backlog represents work in GS. The company is optimistic about its margin expansion and broad-based growth across all segments in the near term. KBR’s primary growth drivers include high-end and differentiated government business work and technology and consulting business.

On the whole, product diversification, energy efficiency, and more sustainable technologies and solutions have been driving KBR’s performance. The overall demand for olefins for non-single-use plastics and in refining for product diversification and more green solutions to meet tighter environmental standards has been strong. The company continues to see increasing activity across the advisory portfolio, particularly in energy transition.

Restructuring and Reorganizational Plans: KBR has been executing plans to improve profitability and reduce the risk of its business profiles. During the first quarter of 2020, KBR’s management introduced a restructuring program to optimize costs and improve operational efficiencies. In the second quarter of 2020, management approved additional restructuring activities in connection with the decision to discontinue pursuing certain projects, principally lumpsum EPC and commoditized construction services, including LNG. The restructuring plan comprised the reorganization of KBR's management structure, primarily within the Energy Solutions business segment, during the first and second quarter of 2020.

KBR has completed its portfolio review and transformed itself from a three-segment business model to a two-segment model, featuring GS and Sustainable Technology Solutions (“STS”). Strengthening of the STS business with its high-end, sustainability-focused industrial sector expertise and client relationships creates exciting synergy opportunities.

Inorganic Strategies & Alliances: KBR has a penchant for acquisitions and strategic alliances for bolstering inorganic growth and expanding market share. In October 2020, KBR acquired Centauri, LLC, a leading independent provider of high-end space, directed energy and other advanced technology solutions.

On Mar 6, 2020, the company acquired certain assets and assumed liabilities of Scientific Management Associates Pty Ltd’s government defense business to enhance its position as a provider of high-end technical training to the Australian Armed Forces and Navy. The acquired business provides technical training services to the Royal Australian Navy. This acquisition was part of its GS segment.

The company is optimistic about the prospects of these buyouts, mainly on account of increased government spending across space and defense.

 

Zacks Investment ResearchImage Source: Zacks Investment Research

 

Concerns

KBR’s business is affected by intense competition, volatility of commodity prices along with uncertain global political and economic conditions. The recent disruption in energy markets on a global basis has been impacting KBR’s order flow.

KBR’s domestic and foreign operations are subject to significant competitive pressure. In order to survive the competition, the company needs to keep itself constantly updated about state-of-the-art construction procedures, which involve huge capital expenditure. This additional cost hurts the company’s near-term margins and operating income.

Also, delays in the timing of awards or cancellation of potential projects as a result of economic conditions, material and equipment pricing, and availability or other factors could affect the company’s long-term results.

Zacks Rank

KBR — which shares space with Quanta Services, Inc. (PWR - Free Report) , Jacobs Engineering Group Inc. (J - Free Report) and AECOM (ACM - Free Report) in the same industry — currently carries a Zacks Rank #3 (Hold).  You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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