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Solid Backlog & Buyouts Drive KBR Amid Intense Competition

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KBR, Inc. KBR is poised to benefit from solid backlogs, strategic buyouts and organic growth across its businesses — Government Solutions, Technology Solutions and Energy Solutions. Notably, new awards in the Government Solutions segment, strong execution across its chemical, petrochemical, refining and ammonia projects as well as higher proprietary equipment sales continue to drive the company’s performance.

Shares of the company have surged 97.9% in the past year compared with the industry’s 30.3% growth. Also, it has outperformed the S&P 500’s 30.7% rise in the said period. Notably, KBR’s earnings surpassed the Zacks Consensus Estimate in all of the trailing seven quarters.

However, risk of cost overruns, intense competition and dependency upon major construction contracts are concerns.

Let’s delve into the factors that substantiate the company’s Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Driving Factors

Government Solutions – Key Growth driver: KBR is banking on the strength of the Government Solutions segment. The segment, which contributed 68% to total revenues, has been a key growth driver. The performance of this business is exceeding market expectation, which bodes well.

The Government Solutions segment recorded 22%, 16% and 5% growth in the first, the second and the third quarter of 2019, respectively. KBR’s industry-leading organic revenue improvement was underpinned by on-contract growth in logistics and engineering, take-away wins along with new work awarded under the company’s portfolio of well-positioned contracting vehicles. During the third quarter, the company received new awards that included a project for the defense health agency and operations contract with NASA.

Moreover, the company has been recording solid top-line growth in the Technology Solutions and Energy Solutions businesses.

During the third quarter, Technology Solutions' revenues increased 18.5% year over year on strong execution across its chemical, petrochemical, refining and ammonia projects as well as higher proprietary equipment sales. Energy Solutions' revenues increased 31% year over year on the back of cost-reimbursable projects, including a brownfield revamp refinery project in the U.S. Gulf Coast, a crude terminal expansion project in the Permian Basin and a greenfield methanol project in Louisiana.

Backlogs & Acquisitions: KBR’s solid backlog level of $14.6 billion (as of Sep 30, 2019) compared with $13.5 billion at 2018-end highlights its underlying strength. Going forward, KBR expects broad-based growth across all the segments, thanks to high-end and differentiated government services work, strong margin performance as well as technology and consulting.

Moreover, the company’s initiative to boost inorganic growth and market expansion bodes well. Recently, the company announced the acquisition of RRT Global’s isomerization technologies to offer more octane and clean fuel technology solutions to customers. In 2018, the company completed the SGT and the Aspire acquisitions. Notably, the company is optimistic on account of increased government spending across space and defense.


Given that KBR’s contracts are usually for the long term, the company is dependent upon major construction projects or Front End Engineering Design (FEED) contracts, which take longer to complete. Therefore, unpredictable timing between the contract win and payment lead to significant fluctuations in cash flow and earnings that affect results. As the major portion of revenues is generated from some important contracts, any loss, cancellation or delay in projects by the same negatively affects the top line.

KBR’s domestic and foreign operations are subject to significant competitive pressure. In order to survive the competition, the company needs to incur huge capital expenditure to constantly update with the state-of-the-art construction procedures. This is likely to hurt the near term margins and operating income.

Moreover, on a P/E (TTM) basis, KBR’s stock looks a bit overvalued compared with the industry, with respective tallies of 19.09x and 16.31x in the past year. Currently, the stock is trading higher than the median P/E (TTM) range.

Key Picks

Some better-ranked stocks in the Zacks Construction sector are Gates Industrial Corporation plc GTES, Foundation Building Materials, Inc FBM and Quanta Services, Inc (PWR - Free Report) . Gates Industrial and Foundation Building currently sport a Zacks Rank #1, while Quanta Services carries a Zacks Rank #2 (Buy).

Gates Industrial surpassed earnings estimates in two of the trailing four quarters, the average positive surprise being 12.1%.

Foundation Building has expected earnings per share growth rate of 54.1% for three-five years.

Quanta Services 2020 earnings are expected to rise 20.9%.

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