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KBR’s Shares Increase 70% YTD: Can the Bull Run Continue?

Zacks

KBR, Inc.’s KBR shares have rallied 70% in the year-to-date period, broadly outperforming its industry’s growth of 20.3%. The solid performance is mainly backed by high-end and differentiated government business work, strong margin performance, and the technology and consulting business. Also, strong opportunities in the energy market are adding to the bliss.

Encouragingly, earnings estimates for the current year have been trending upward over the past 30 days, reflecting analysts’ optimism surrounding the company’s bottom-line prospects. Notably, earnings of the company — which shares space in the industry with AECOM ACM, Quanta Services, Inc. PWR and Jacobs Engineering Group Inc. JEC — topped the Zacks Consensus Estimate in each of the trailing six quarters.



Let us delve deeper into factors that make this Zacks Rank #2 (Buy) stock a profitable pick. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Strength in Government Solutions Business: KBR is banking on the strength of the Government Solutions segment. The business — which accounted for nearly 73% of second-quarter 2019 revenues — is exceeding market expectation, which is adding to its bliss.

The segment recorded 30% revenue growth in first-half 2019. The growth was underpinned by on-contract growth in logistics and engineering, take-away wins, alongside new work awarded under the company’s portfolio of well-positioned contracting vehicles. Notably, more than 77% of its total backlog (reported at the end of the second quarter) represents work in Government Solutions.

Majority of the work constitute long-term reimbursable service annuity-type contracts that have significantly lower risks than some of the other projects. The company believes that this will ultimately help in margin expansion and considerably de-risking business. Notably, KBR expects growth across all key markets served, driven by continued opportunities across the lifecycle of projects.

Technology Segment – A Bright Spot: KBR’s Technology Solutions segment is performing pretty well of late. The upside is primarily driven by increased refining and petrochemicals projects in China, India and Africa, as well as strong technologies demand.

The segment’s impressive performance is evident from significant revenue growth in the last two reported quarters. In the first and second quarters of 2019, the segment recorded 48% and 29% organic revenue growth, respectively. The results were primarily backed by rising demand for its innovative solutions across chemical, petrochemical and refining markets, as well as increased bundling of technology licenses with ancillary services, proprietary equipment and catalysts.

Markedly, prospects in the refining and petrochemicals market remain robust. Particularly, the company foresees continued activity in the ethylene area under the present macroeconomic environment. Importantly, KBR’s scale and global reach helped it secure some long-term service agreements with notable companies like Chevron, BP, International Paper and many more. It believes the next wave of ethylene cracker projects across key markets are right around the corner. This will bode well for the company’s future growth. Notably, KBR is the only license holder of polycarbonate technology, which positions it pretty well for future expansion in the sector.

Solid Prospects in Energy Solutions Business: Of late, KBR is experiencing growth in recurring revenue services and consulting businesses on the back of solid project execution. As of Jun 30, 2019, the segment contributed $2.63 billion or 19% to its total backlog. Notably, 75% of the backlog represents service businesses like high-end technical consultancy, pre-FEED, FEED and PMC, as well as sustaining capital construction services and maintenance. Further, LNG activity is rising on the back of increased demand from China and India for environmental reasons.

The company anticipates persistent growth in the segment, with impressive margin performance in mid-20%. Also, KBR believes that a healthy balance between energy and government projects positions it well for future growth.

Superior ROE: KBR’s return on equity (ROE) is indicative of growth potential. The company’s ROE of 13.09% compares favorably with the industry average of 10.8%, implying that it is efficient in using its shareholders’ funds.

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