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KBR or FLR: Which Construction Stock to Keep a Watch on?

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Increased focus on fixing the country’s infrastructure is gradually providing traction to the construction sector. Biden administration’s endeavor to pump money into rebuilding the nation's roads, bridges and other infrastructure would give construction companies a solid foundation for growth.

Solid construction activities in the public sector, low interest/mortgage rates, an improving job market and solid GDP numbers have helped the Zacks Construction sector to gain 55.4% over the past year, outperforming the broader market’s (S&P 500) 40% rally. Given this backdrop, construction stocks could offer a safe haven to investors because of their stability and the fact that these are fundamentally strong enough to withstand industry woes.

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Here, we focus on two companies from the Zacks Engineering - R&D Services industry falling under the broader Construction space — KBR, Inc. (KBR - Free Report) and Fluor Corporation (FLR - Free Report) . At present, market capitalization of KBR is $5.41 billion, while that of Fluor stands at $2.46 billion. Both KBR and Fluor currently carry a Zacks Rank #3 (Hold). The Zacks Engineering – R&D Services industry currently carries a Zacks Industry Rank #86, which places it at the top 34% of more than 250 Zacks industries. Favorable infrastructure spending has been driving the performance of engineering, procurement and construction service providers from the Construction space. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Before drawing a head-to-head comparison between KBR and FLR, let’s check out a few key statistics of the companies.

Six-Month Stock Performance

KBR, which shares space with Jacobs Engineering Group Inc. (J - Free Report) and AECOM (ACM - Free Report) in the same industry, have gained 20.9% over the past six months. However, Fluor’s shares have declined 2.3% over the same time frame. Meanwhile, the Engineering - R&D Services industry has gained 18.2% during the period. Hence, KBR fares much better than Fluor in this parameter.

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The industry is clearly undervalued than the S&P 500, with respect to forward 12-month price-to-earnings (P/E) ratio. This implies that the industry has upside potential for the near future. The industry has an average forward 12-month P/E ratio — which is the best multiple for valuing Engineering - R&D Services stocks — of 21.2, which is below the S&P 500’s average of 22.1. Hence, it might be a good idea to focus on stocks belonging to this particular industry.

Coming to the two stocks under consideration, KBR and Fluor — with a 12-month forward P/E ratio of 17.1 and 18, respectively — are undervalued than the S&P 500 and the industry.

Comparing the two stocks, KBR is less pricey than Fluor.

Earnings Growth Projections & Surprises

Analysts expect KBR’s earnings to grow at a 22% rate in 2021. Comparatively, Fluor’s earnings are expected to grow 129.7% over the same time frame. Hence, Fluor’s higher growth rate implies greater potential for capital appreciation.

Hence, Fluor is a clear winner in terms of earnings growth expectation.

Meanwhile, considering a more comprehensive earnings history, KBR surpassed estimates in all the last four quarters, with an average surprise of 5.4%. That said, Fluor missed analysts’ expectations in three of the last four quarters.

Hence, KBR has a superior average surprise than Fluor in the said period.

Profitability and Returns

Profitability and returns are a measure of the quality of a company’s business and growth opportunities. Return on Capital (ROC) of KBR is 8.6%, while that of Fluor is negative 3.7%. The industry has ROC of 5.1%. This signifies that KBR’s business generates a higher return on investment than Fluor’s.

Return on Equity (ROE) is a measure of a company’s efficiency in utilizing shareholders’ funds. ROE in the trailing 12 months for KBR is 15.7%. Fluor’s trailing 12-month ROE is negative 8.6%. While KBR has outpaced the industry level of 9.4%, Fluor has failed to surpass the same in the said period.

The Verdict

KBR appears to be a comparatively better investment option than Fluor in terms of share price performance, earnings surprise history, ROE, ROC and valuation.

However, Fluor holds an advantage when it comes to earnings growth rate for the current year. Overall, our comparative analysis shows that KBR has an edge over Fluor.

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In-Depth Zacks Research for the Tickers Above

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Fluor Corporation (FLR) - free report >>

AECOM (ACM) - free report >>

KBR, Inc. (KBR) - free report >>

Jacobs Engineering Group Inc. (J) - free report >>