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KBR Poised to Grow on Business Diversification & Buyouts

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On Dec 29, we issued an updated research report on KBR, Inc. (KBR - Free Report) .

Inside Story

Over the last month, shares of this Zacks Rank #2 (Buy) company yielded a return of 7.2%, outperforming 3.1% growth recorded by the industry.

KBR is poised to boost its competency on the back of the company's diverse business portfolio. The company expands operations in various business streams such as government services work, technology and consulting.

Currently, KBR is banking on the strength of its Government Services businesses to optimize the growth potential. During the third quarter of 2017, this segment recorded phenomenal growth, driven by the acquisition of Honeywell Government Services Provider (‘HTSI’) as well as the continued expansion of task orders on the existing U.S. Government contracts. The company remains optimistic about its prospects, primarily driven by contracts secured from the U.S. military, along with the latest deal clinched with the U.K. Ministry of Defense. This segment is anticipated to execute almost $3 billion in contracts in 2017.

The company also estimates steady growth for its Technology & Consulting segment. The company’s solid pipeline in the downstream market, particularly in the United States and Middle East, presents a good opportunity for further growth in the fourth quarter and beyond. It foresees decent opportunities in ammonia, petrochemical and refining. For 2017, KBR believes it will witness a mix of both Brownfield and Greenfield opportunities for the segment (especially consulting sector in the upstream area), largely driven by escalating commodity prices and the underlying global demand. Selective opportunities in the downstream petrochemical and ethylene projects, and growing number of small-scale LNG projects in North America are anticipated to boost growth of hydrocarbons.

KBR also has a penchant for acquisitions and strategic alliances for bolstering its inorganic growth and expanding market share. Last year, the company completed several strategic acquisitions, including two established and highly technical government services companies.

Moreover, KBR remains strongly committed to restructuring its operations and is targeting to achieve improvement in segment profit margin. Per the blueprint of KBR’s restructuring plans, the company trimmed its businesses from 16 to 5 in order to save $200 million in operating costs. Under its prudent portfolio-streamlining initiatives, KBR has divested underperforming businesses, sold the Building Group, the Infrastructure Group, closed the U.S. mining business in 2015 and sold off half of its industrial services to Stantec Consulting Services, as it fared poorly in these areas.

In addition, the company anticipates to improve its capital-deployment options on the back of stronger expected conversion of earnings to cash flow for 2018 and beyond. The resolution of the Pemex settlement gives KBR greater visibility on 2017 operating cash flows. In the third quarter of 2017, cash flow generated from operating activities totaled $28 million, up from cash generation of $20 million reported in the year-ago quarter. The company reiterated its guidance for cash flows and expects it in the range of $120-$200 million for full-year 2017.

Other Stocks to Consider

Some other top-ranked stocks in the industry are listed below:

Boise Cascade, L.L.C. (BCC - Free Report) currently sports a Zacks Rank of 1 (Strong Buy). The company has pulled off an average earnings surprise of 116.28% in the last four quarters. You can see the complete list of today’s Zacks #1 Rank stocks here.

Energy Focus, Inc. (EFOI - Free Report) carries a Zacks Rank of 2. The company generated an average earnings surprise of 12.35% over the preceding four quarters.

EMCOR Group, Inc. (EME - Free Report) also holds a Zacks Rank of 2. The company has pulled off an average earnings surprise of 16.96% during the same time frame.

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