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KBR's Government Services Business Strong, Competition Rife

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KBR, Inc. (KBR - Free Report) has been benefiting from differentiated government services work over the last few quarters. On the top of this, the company’s solid execution across all segments and accretive acquisitions are acting as growth catalysts. However, risk of cost overruns, intense competition and its dependency upon major construction contracts pose concerns.

Not long ago, this Houston, TX-based global engineering, construction and services firm reported solid fourth-quarter results, wherein adjusted earnings and revenues topped the Zacks Consensus Estimate by 5.4% and 6.7%, and improved 39.3% and 41.9% on a year-over-year basis, respectively, given robust performance of Government Services and Technology businesses.

Meanwhile, the company’s shares have gained 21.3% in the past three months, comparing favorably with its industry’s rally of 21.1%. Earnings estimates for 2019 have moved 2.8% north over the past 60 days. This upside reflects analysts’ optimism surrounding the company’s future earnings potential. Its price performance is backed by an impressive earnings history. KBR surpassed the Zacks Consensus Estimate in six of the trailing seven quarters.


 

Let’s delve deeper and analyze the stock’s prospects:

Driving Factors

Government Services Business - Key Growth Driver: The company’s Government Services or GS segment, accounting for more than 72% of the total revenues, has been a key growth driver. The performance of this business is exceeding the market’s expectation, which is adding to its bliss.

The GS segment recorded 78% revenue growth in 2018. KBR’s industry-leading organic revenue improvement of 17% was underpinned by on-contract growth in logistics and engineering, take-away wins, and new work awarded under the company’s portfolio of well-positioned contracting vehicles. Organically, sales of GS business recorded 31% growth in the fourth quarter, following a 12% increase in the third quarter and 11% uptick in both the second and first quarters of 2018.

Ongoing growth in KBR’s overseas logistics and mission support programs, given higher military exercise activities, increased outsourcing of sustainment activities by the military, and the ramp up of the new wins, led to considerable growth. Moreover, higher tasking for various missile defense and other military priorities in its engineering business areas, under select IDIQ contracts, led to the upside.

Strong Backlog: KBR’s strong backlog level highlights its underlying strength. The company’s backlog was $13.5 billion (as of Dec 31, 2018) compared with $10.6 billion in the corresponding period of 2017. Going forward, KBR expects broad-based growth across all its segments that include high-end and differentiated government services work, strong margin performance, and technology and consulting.

Acquisition Synergies: KBR has been bolstering inorganic growth and market expansion over the last few quarters. In April 2018, the company acquired Stinger Ghaffarian Technologies, Inc. (“SGT”) and Aspire, and recorded higher margins in each of the second, third and fourth quarters of 2018. The company remains optimistic about the prospects of these buyouts.

Headwinds

KBR’s business is being affected by intense competition, volatility of commodity prices, along with uncertain global political and economic conditions. Its domestic and foreign operations are subject to major competitive pressure. Hence, the company needs to keep itself constantly updated about state-of-the-art construction procedures that involve huge capital expenditure, which hurts near-term margins and operating income.

KBR’s major portion of revenues is generated from some important customers. Hence, any loss, cancellation or delay in the projects by key customers might negatively affect its top line in the future. For example, revenues from the U.S. government accounted for 53% of total consolidated revenues in 2018. The loss of one or more of its key customers, or cancellation or delay in their projects may significantly affect revenues and results of operations.

Zacks Rank & Key Picks

KBR currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Some better-ranked stocks in the Zacks Construction sector include Quanta Services, Inc. (PWR - Free Report) , Altair Engineering Inc. (ALTR - Free Report) and Arcosa, Inc. (ACA - Free Report) . While Quanta Services sports a Zacks Rank #1, the other two stocks carry a Zacks Rank #2 (Buy).

Quanta Services and Altair Engineering’s earnings for the current year are expected to grow 25.3% and 58.6%, respectively.

Arcosa has a three to five year expected EPS growth rate of 13.1%.

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