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KBR, Inc. (KBR - Free Report) has been reaping benefits from its diversified service portfolio, which includes the Government Solutions (GS) segment and the Sustainable Technology Solutions (STS) unit.
The GS segment’s contribution remains solid, thanks to the growth in the U.S. budget, especially toward emerging technologies accompanied by the increased demand patterns in its international business.
Moreover, the company’s strong liquidity provides it enough room to boost investors’ value.
However, stiff competition, as well as increased costs and expenses, are hindering the company’s prospects to some extent. Shares of this global engineering, construction and services firm have gained 13.8% in the past year compared with the Zacks Engineering - R and D Services industry’s 53% growth.
Image Source: Zacks Investment Research
Nonetheless, this Zacks Rank #3 (Hold) company’s earnings estimates for 2024 showcase a growth rate of 10.3% from the year-ago period. The positive trend signifies bullish analysts’ sentiments, robust fundamentals and prospects of outperformance in the near term.
Let’s discuss the contributing factors in detail.
Robust Fundamental Aids
Strength in GS Business Provides Stability: KBR’s GS unit has been performing pretty well, thanks to the strength of the business to optimize its growth potential. The segment is benefiting from favorable defense, space and military budgets both in the U.S. and international markets.
The majority of these work are 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 de-risking of business considerably.
GS revenues increased 4.4% year over year to $1.39 billion. The upside was backed by new and on-contract growth across its businesses. Adjusted EBITDA margin of 10.1% rose 20 bps year over year. The segment benefited from the favorable international mix, excellent award fees and strong project execution. At the first-quarter end, the trailing 12-month book-to-bill ratio for GS was 1.2x.
Rising Technology Needs Boost Contract Flow: KBR has been gaining from the rising global importance of national security, energy security, energy transition and climate change. KBR's determination to reduce emissions, diversify products, improve energy efficiency and implement more sustainable technologies and solutions have been driving its performance. Demand for the company’s technologies in ammonia for food production, olefins for non-single-use plastics and refining for product diversification and more green solutions to meet tighter environmental standards have been going strong.
KBR has been working on multiple initiatives and contracts to expand its low-carbon ammonia offerings for energy transition, which is a crucial step toward global decarbonization efforts. It has been a world leader in ammonia technology and has been at the forefront of innovation in the same market for decades.
Solid Backlog Level Boosts Confidence in the Future: KBR’s solid backlog and option level of $20.8 billion at the first-quarter end highlight its underlying strength. KBR received $1.9 billion in bookings and options in highly strategic areas with a trailing 12-month book-to-bill of 1.1x.
Total revenues increased 7% year over year (all organic) in the first quarter. The upside was backed by growth across STS as well as the GS’ new and on-contract growth across International, Defense & Intel, and Science and Space, partially offset by the contraction in Readiness & Sustainment due to Ukraine funding delays.
Going forward, KBR expects broad-based growth across both segments. Primary growth drivers include high-end and differentiated government business work, strong margin performance and technology and consulting business.
Stable Liquidity Enhances Shareholder Value: KBR has a stable balance sheet position that helps it enhance its shareholders’ value. At the first-quarter end, KBR’s cash and cash equivalents were $314 million, up from $304 million at 2023-end. It also has a $947 million revolving credit facility.
Long-term debt was $1.84 million at the first quarter of 2024-end, up from $1.8 million at 2023-end. Although the long-term debt is slightly higher compared with the 2023-end figure, the company has sufficient funds to meet the short-term obligation of $22 million.
On an impressive note, KBR boosted its quarterly dividend by 11% on Feb 19, 2024. This represents the fifth successive year of dividend increases.
Superior ROE: KBR’s superior return on equity (ROE) is also indicative of growth potential. The company’s ROE currently stands at 26.1%. This compares favorably with ROE of 17.1% for the industry it belongs to. This indicates efficiency in using its shareholders’ funds and the ability to generate profit with minimum capital usage.
Industry Woes Ail
Highly Competitive Market: KBR has been working in a highly-fragmented industry. KBR’s domestic and foreign operations are subject to significant competitive pressure. To survive the competition, the company needs to keep itself constantly updated about state-of-the-art construction procedures, which involve huge capital expenditure. However, it might hurt near-term margins and operating income.
Dependent More on Government Projects: KBR’s major portion of revenues is generated from some important customers. Hence, any loss, cancelation or delay in projects by key customers in the future might negatively impact its top line. Revenues from the U.S. government accounted for 58% of total consolidated revenues for fiscal 2023.
Key Picks
Some better-ranked stocks in the Zacks Construction sector are:
The Zacks Consensus Estimate for MPTI’s 2024 sales and earnings per share (EPS) indicates a rise of 8.8% and 58.6%, respectively, from the prior-year levels.
Howmet Aerospace Inc. (HWM - Free Report) presently carries a Zacks Rank #2. HWM has a trailing four-quarter earnings surprise of 8.5%, on average.
The Zacks Consensus Estimate for HWM’s 2024 sales and EPS indicates a rise of 10.6% and 29.9%, respectively, from the prior-year levels.
Gates Industrial Corporation plc (GTES - Free Report) presently carries a Zacks Rank #2. GTES has a trailing four-quarter earnings surprise of 14.9%, on average.
The Zacks Consensus Estimate for GTES’ 2024 sales indicates a 0.2% decline but EPS growth of 2.9% from the prior-year levels.
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KBR Banks on Solid Backlog & GS Prospect Amid Stiff Competition
KBR, Inc. (KBR - Free Report) has been reaping benefits from its diversified service portfolio, which includes the Government Solutions (GS) segment and the Sustainable Technology Solutions (STS) unit.
The GS segment’s contribution remains solid, thanks to the growth in the U.S. budget, especially toward emerging technologies accompanied by the increased demand patterns in its international business.
Moreover, the company’s strong liquidity provides it enough room to boost investors’ value.
However, stiff competition, as well as increased costs and expenses, are hindering the company’s prospects to some extent. Shares of this global engineering, construction and services firm have gained 13.8% in the past year compared with the Zacks Engineering - R and D Services industry’s 53% growth.
Image Source: Zacks Investment Research
Nonetheless, this Zacks Rank #3 (Hold) company’s earnings estimates for 2024 showcase a growth rate of 10.3% from the year-ago period. The positive trend signifies bullish analysts’ sentiments, robust fundamentals and prospects of outperformance in the near term.
Let’s discuss the contributing factors in detail.
Robust Fundamental Aids
Strength in GS Business Provides Stability: KBR’s GS unit has been performing pretty well, thanks to the strength of the business to optimize its growth potential. The segment is benefiting from favorable defense, space and military budgets both in the U.S. and international markets.
The majority of these work are 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 de-risking of business considerably.
GS revenues increased 4.4% year over year to $1.39 billion. The upside was backed by new and on-contract growth across its businesses. Adjusted EBITDA margin of 10.1% rose 20 bps year over year. The segment benefited from the favorable international mix, excellent award fees and strong project execution. At the first-quarter end, the trailing 12-month book-to-bill ratio for GS was 1.2x.
Rising Technology Needs Boost Contract Flow: KBR has been gaining from the rising global importance of national security, energy security, energy transition and climate change. KBR's determination to reduce emissions, diversify products, improve energy efficiency and implement more sustainable technologies and solutions have been driving its performance. Demand for the company’s technologies in ammonia for food production, olefins for non-single-use plastics and refining for product diversification and more green solutions to meet tighter environmental standards have been going strong.
KBR has been working on multiple initiatives and contracts to expand its low-carbon ammonia offerings for energy transition, which is a crucial step toward global decarbonization efforts. It has been a world leader in ammonia technology and has been at the forefront of innovation in the same market for decades.
Solid Backlog Level Boosts Confidence in the Future: KBR’s solid backlog and option level of $20.8 billion at the first-quarter end highlight its underlying strength. KBR received $1.9 billion in bookings and options in highly strategic areas with a trailing 12-month book-to-bill of 1.1x.
Total revenues increased 7% year over year (all organic) in the first quarter. The upside was backed by growth across STS as well as the GS’ new and on-contract growth across International, Defense & Intel, and Science and Space, partially offset by the contraction in Readiness & Sustainment due to Ukraine funding delays.
Going forward, KBR expects broad-based growth across both segments. Primary growth drivers include high-end and differentiated government business work, strong margin performance and technology and consulting business.
Stable Liquidity Enhances Shareholder Value: KBR has a stable balance sheet position that helps it enhance its shareholders’ value. At the first-quarter end, KBR’s cash and cash equivalents were $314 million, up from $304 million at 2023-end. It also has a $947 million revolving credit facility.
Long-term debt was $1.84 million at the first quarter of 2024-end, up from $1.8 million at 2023-end. Although the long-term debt is slightly higher compared with the 2023-end figure, the company has sufficient funds to meet the short-term obligation of $22 million.
On an impressive note, KBR boosted its quarterly dividend by 11% on Feb 19, 2024. This represents the fifth successive year of dividend increases.
Superior ROE: KBR’s superior return on equity (ROE) is also indicative of growth potential. The company’s ROE currently stands at 26.1%. This compares favorably with ROE of 17.1% for the industry it belongs to. This indicates efficiency in using its shareholders’ funds and the ability to generate profit with minimum capital usage.
Industry Woes Ail
Highly Competitive Market: KBR has been working in a highly-fragmented industry. KBR’s domestic and foreign operations are subject to significant competitive pressure. To survive the competition, the company needs to keep itself constantly updated about state-of-the-art construction procedures, which involve huge capital expenditure. However, it might hurt near-term margins and operating income.
Dependent More on Government Projects: KBR’s major portion of revenues is generated from some important customers. Hence, any loss, cancelation or delay in projects by key customers in the future might negatively impact its top line. Revenues from the U.S. government accounted for 58% of total consolidated revenues for fiscal 2023.
Key Picks
Some better-ranked stocks in the Zacks Construction sector are:
M-tron Industries, Inc. (MPTI - Free Report) currently carries a Zacks Rank #2 (Buy). It has topped earnings estimates in three of the trailing four quarters and missed once, with an average surprise of 26.7%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Zacks Consensus Estimate for MPTI’s 2024 sales and earnings per share (EPS) indicates a rise of 8.8% and 58.6%, respectively, from the prior-year levels.
Howmet Aerospace Inc. (HWM - Free Report) presently carries a Zacks Rank #2. HWM has a trailing four-quarter earnings surprise of 8.5%, on average.
The Zacks Consensus Estimate for HWM’s 2024 sales and EPS indicates a rise of 10.6% and 29.9%, respectively, from the prior-year levels.
Gates Industrial Corporation plc (GTES - Free Report) presently carries a Zacks Rank #2. GTES has a trailing four-quarter earnings surprise of 14.9%, on average.
The Zacks Consensus Estimate for GTES’ 2024 sales indicates a 0.2% decline but EPS growth of 2.9% from the prior-year levels.