KBR, Inc.’s KBR shares have outperformed its industry in the past year. The company’s price performance is backed by an impressive earnings history and solid backlog position. KBR surpassed the Zacks Consensus Estimate in three of the trailing four quarters, with average surprise of 12.6%. Both its top and bottom lines increased 31.4% and 23.6% year over year in the third quarter of 2018. Strong organic growth from Government Services and Technology businesses, solid execution across all segments, accretive growth from Aspire and SGT, along with buoyant government contracting and hydrocarbons end markets led to the upside.
Earnings estimates for 2018 and 2019 have also been revised 0.7% and 3.7% upward, respectively, over the past 30 days, reflecting analysts’ optimism surrounding the company’s future earnings potential. Let us delve deeper into the factors that make this Zacks Rank #2 (Buy) stock a profitable pick.
Strong Segmental Performance: KBR’s Government Services segment (GS) and Hydrocarbons Services business (HS), together accounting for more than 93% of the total revenues, have been performing pretty well of late.
The company has been generating double-digit organic sales in the GS segment over the past few quarters. It has been receiving high-end and differentiated GS work over the past few quarters, leading to growth. KBR’s overseas logistics and mission support programs with higher military exercise activities, increased outsourcing of sustainment activities by the military and the ramp up of new wins also added to the positives. The company remains optimistic about its future prospects.
Also, KBR’s HS unit is foreseeing some decent opportunities in ammonia, petrochemical and refining, which will boost the growth of HS segment. As of Sep 30, 2018, the segment backlog was approximately $1.9 billion compared with nearly $1.8 billion on Dec 31, 2017. The company remains optimistic about backlog growth in 2018 and early 2019, backed by work in consulting areas. KBR believes that the healthy balance between hydrocarbons and government projects positions it well for future growth.
Opportunities in Refining & Petrochemicals Market: KBR seeks various opportunities in the refining and petrochemicals market across the world. The company foresees continued activity in the ethylene area under the present macroeconomic environment. KBR believes that it is underrepresented in the Middle East, particularly outside Saudi Arabia, which provides it with ample opportunities for expansion in the region. KBR’s scale and global reach helped it secure long-term service agreements.
Notably, KBR is the only license holder of polycarbonate technology, which positions it pretty well for future expansion in the sector. The company’s Technology segment continues to perform well in the recent times, driven by refining and petrochemicals projects in China, India, and Africa, as well as strong technology demand. During the third quarter, the said segment recorded 35% organic growth and a record backlog of $544 million, which was up 95.7% from the prior-year level.
Acquisition Synergies: KBR has been bolstering inorganic growth and market expansion over the past few quarters. In April 2018, the company acquired SGT and Aspire, and recorded higher margins in each of the second as well as the third quarter of 2018. Moreover, it completed several strategic acquisitions in 2017. The company remains optimistic about the prospects of these buyouts.
Solid VGM Score: It has an impressive VGM Score of A. Our VGM Score identifies stocks that have the most attractive value, growth and momentum characteristics. In fact, our research shows that stocks with VGM Scores of A or B when combined with a Zacks Rank #1 or 2 offer solid investment choices.
Solid Growth Prospects: KBR has solid growth prospects, as is evident from the Zacks Consensus Estimate for current-quarter earnings of 37 cents per share, which is expected to grow 32.1% year over year. Notably, the company has a three-five year expected EPS growth rate of 10.6%.
Overall, it constitutes a great pick in terms of value investment, supported by a Value Score of A.
Stocks to Consider
Some better-ranked stocks in the Zacks Construction sector are Altair Engineering Inc. ALTR, Lennox International, Inc. LII and EMCOR Group, Inc. EME, each carrying a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Altair’s earnings are expected to grow 23.1% in 2018.
Lennox’s 2018 earnings are expected to grow 18.3%.
EMCOR’s earnings for the current year are expected to increase 20%.
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