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KBR Surges More Than 61% YTD, Outperforms Peers & S&P 500

Zacks Equity Research

KBR, Inc. KBR has been gaining investors’ confidence on the back of robust contribution from Government and Technology Solutions businesses, courtesy of ongoing growth in overseas logistics and mission support programs.

Shares of the company have rallied 61.1% so far this year compared with its industry’s 23.2% collective growth. Also, the company has outperformed the S&P 500’s 16.2% rise in the said period. Encouragingly, its earnings surpassed the Zacks Consensus Estimate in seven of the trailing eight quarters.

Notably, earnings estimates have been upwardly revised over the past few weeks, suggesting that sentiments on KBR are moving in the right direction. Although earnings estimates for 2019 have remained stable, the same for 2020 has moved up 2.7% over the past 60 days. This positive trend signifies bullish analysts’ sentiments and justifies the company’s Zacks Rank #2 (Buy), indicating robust fundamentals and the expectation of outperformance in the near term. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Key Catalysts

Strong Growth Prospects in Government & Technology Solution Businesses: KBR's revenue momentum is underpinned by industry-leading organic growth from Government Solution and Technology Solution businesses. The company’s Government business, accounting for almost 72.7% of total revenues, has been performing pretty well. Organically, sales from the Government Solutions business recorded 22% growth in the first quarter, following a 31% increase in fourth-quarter 2018. The segment recorded 44% revenue growth in the first quarter. Its industry-leading organic revenue 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.

KBR’s Technology business, which contributed 6.9% to total revenues, generated 48.4% revenue growth (48% on an organic basis) in the first quarter of 2019. The company continues to experience strong demand for innovative solutions across chemical, petrochemical and refining markets. Higher proprietary equipment sales also contributed to the upside.

Solid Backlog to Aid Top Line: KBR’s solid backlog level of $13.6 billion (as of Mar 31, 2019), compared with $13.5 billion in the corresponding period of 2018, highlights its underlying strength. Notably, nearly 80% of the backlog represents work in Government Solutions. Majority of the work represent 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 of business. Going forward, KBR expects broad-based growth across all segments. Primary growth drivers include high-end and differentiated government business work, strong margin performance, and technology and consulting business.

The company, which shares space with Fluor Corporation FLR, Jacobs Engineering Group Inc. JEC and Quanta Services, Inc. PWR in the Zacks Engineering - R and D Services industry, currently expects 2019 adjusted earnings per share in the band of $1.58-$1.73.

Operating cash flows are projected in the range of $175-$205 million, with operating cash flow to net income ratio of 90-110%.

Impressive Inorganic Drive: Acquisitions and strategic alliances have been KBR’s preferred mode of expanding market share and leveraging new business opportunities. The acquisitions of SGT and Aspire in 2018 had helped the company to record double-digit organic growth and higher margins in each of the second and third quarters of 2018. It remains optimistic about the prospects of both the buyouts, mainly on account of increased government spending across space and defense.

Superior ROE: KBR’s return on equity (“ROE”) supports its growth potential. The company’s ROE of 12.8% compares favorably with the industry’s average of 11.4%, implying that it is efficient in using its shareholders’ funds.

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