KBR Can Continue To Outperform (NYSE:KBR)

Funding Thesis

KBR, Inc. (NYSE:KBR) has outperformed the broader markets, gaining over 7% since my earlier article versus flattish S&P 500 (SPY) efficiency. The corporate’s newest earnings launch, the place its EPS was higher than estimates, served as a catalyst for the inventory. Wanting ahead, KBR ought to proceed to see good income development in FY2023 and past, pushed by robust end-market demand. The demand in each its segments, Authorities Options (GS) and Sustainability Expertise Options (STS), is predicted to stay strong. The STS section ought to profit from the rising alternatives in vitality transition and decarbonization, whereas the expansion within the GS section must be pushed by elements such because the ramp-up of HomeSafe Alliance work, geopolitical stress, and the expansion within the area business. The corporate’s M&A method may present further upside to income development.

Moreover, I anticipate an enchancment within the adjusted EBITDA margin for FY2023 attributable to a good combine and operational leverage. The inventory is attractively valued if we think about the corporate’s development prospects over the following few years. Therefore, I’ve a purchase score on the corporate and imagine it will possibly proceed to outperform.

Income Evaluation & Outlook

KBR reported over 10% Y/Y decline in revenues in FY22. Nevertheless, the underlying enterprise stays robust, and most of this decline was from robust comps from Operation Allies Welcome (OAW) program from the second half of FY21, through which KBR supplied humanitarian assist to refugees from Afghanistan. This undertaking helped enhance income development within the GS section in FY2021 however was low-margin work. The state of affairs was completely different in FY2022, because the OAW program was a non-recurring undertaking, and the absence of this undertaking led to a 13.5% Y/Y lower in income within the GS section. Nevertheless, if we exclude the OAW undertaking, the income within the GS section was up by 9.6% Y/Y in FY2022. The Sustainability Expertise Options section additionally noticed excessive demand in FY2022, pushed by world progress in direction of decarbonization targets, vitality transition, and safety. These megatrends benefited the section, and the income elevated by 4.5% in FY2022.

The TTM E book-to-bill ratio for KBR stood at 1.2x, pushed by $8.2 billion of bookings and choices in FY2022. Because of this, the corporate’s backlog and award choices elevated to ~$19.8 billion, barely greater than the earlier 12 months. Whereas the underlying order development remained robust, the Authorities Options backlog for FY2022 was $11.5 billion, down roughly 8.5% Y/Y attributable to adversarial alternate fee actions within the British Pound in opposition to the U.S. greenback and delays in some contract awards. The Sustainability Expertise Options backlog for the 12 months was $4 billion, up roughly 71% Y/Y.

Wanting forward, KBR has good development prospects in each Sustainable Expertise Options and Authorities Companies segments. The rising alternatives in vitality transition, decarbonization, and the hydrogen financial system ought to propel the STS section’s order development. Moreover, the expansion within the GS section must be pushed by the HomeSafe Alliance work, geopolitical stress, and the expansion within the area business. Moreover, the corporate is predicted to proceed pursuing its M&A method, which ought to present additional upside to income development.

Sustainable Expertise Options Section

KBR continues to spend money on sustainable course of applied sciences and has a world-leading ammonia expertise that contributes to over 50% of the world’s ammonia manufacturing. Whereas historically, ammonia was primarily used within the fertilizer business, I imagine there’s a important development potential for it, as it’s essential for near-term vitality transition necessities and the longer-term development of the hydrogen financial system. Ammonia has a superb potential for use as a carbon-free various for ocean marine vessels. Furthermore, ammonia is an environment friendly service of hydrogen, with one half nitrogen and three components hydrogen, making it essential for the way forward for a inexperienced hydrogen financial system. This must be a long-term driver for KBR.

Within the close to to medium time period, the Inflation Discount Act introduced by the U.S. authorities ought to drive the corporate’s revenues. The Act gives $369 billion in funding for Vitality Safety and Local weather Change applications over the following decade, and KBR is well-positioned to learn from this Act. The corporate has already began seeing elevated exercise attributable to funding from this act, and I anticipate the order momentum to extend because the 12 months progresses.

Authorities Options Section

KBR authorities options enterprise ought to profit from the worldwide concentrate on nationwide safety and security that has elevated attributable to geopolitical tensions and is getting mirrored in authorities budgets. Final December, the U.S. lawmakers handed an $858 billion protection spending funds for FY2023, an 8% enhance from FY2022. Moreover, in October 2022, the Australian authorities introduced a rise of seven.8% Y/Y in its protection funds for FY2022-23 to AUD 48.7 billion, indicating potential alternatives for KBR within the coming quarters.

Additional, KBR ought to profit from the ramp-up of the HomeSafe Alliance order. As mentioned in my earlier article, late final 12 months, a three way partnership led by KBR – HomeSafe Alliance – secured a contract value ~$20 billion. The contract has the potential to final for 9 years and entails offering a service for managing the motion of products for the U.S. Armed Forces, Division of Protection (DoD) civilians, and their households. It’s anticipated that income will begin to enhance from this undertaking in late FY23 and early FY24, following a 9-month transition interval from the date the contract was awarded. This means a significant acceleration in development from the following 12 months.

KBR can also be poised to learn from elevated authorities focus and investments within the area business. The convergence of protection, intelligence, civil, and business stakeholders, elevated pace in growing new capabilities, and digitalization are driving development within the business. KBR’s Mission Planning & Digital Methods Engineering helps construct physics-based fashions and “fly” digital missions in a digital setting. This will increase pace, reduces prices, and improves reliability. Additionally, via Area Area Consciousness, the corporate is offering applied sciences reminiscent of electro-optical sensors and digital warfare to trace and monitor area belongings, enabling protected operations for all. Given the corporate’s technologically superior portfolio and powerful demand within the area business, I’m optimistic concerning the firm’s long-term outlook on this finish market as nicely.

M&A Prospects

On the finish of FY2022, KBR’s money and money equivalents totaled $389 million, and the corporate’s long-term debt was ~$1.376 billion. KBR’s web leverage improved from 2.5x in FY2021 to 2.1x in FY2022. If we take a look at the corporate’s present leverage and between $425mn and $460mn in working money circulate steering, the corporate is in a superb place to do bolt-on M&As, which ought to add to its good natural development prospects.

So, I’m optimistic concerning the firm’s income development outlook.

Margin Outlook & Evaluation

The corporate’s margin improved in FY2022 as the combination improved with the completion of the low-margin OAW program work within the first quarter of FY2022.

Wanting forward, the adjusted EBITDA margin of KBR ought to enhance within the coming quarters, pushed by operational leverage and a good combine shift. The STS section, which has a lot greater margins than the GS section, continues to develop sooner than the GS section. Administration expects the contribution of the Sustainability Expertise Options section to KBR’s earnings to extend from ~30% in FY2022 to ~36% in FY2023. This combine shift ought to assist general margins within the close to and long run.

Valuation & Conclusion

The corporate is buying and selling at 19.37x FY22 consensus EPS estimates whereas its a number of on FY24 and FY25 consensus EPS estimates are 15.27x and 12.09x, respectively. Administration has guided for the corporate’s adjusted EPS to extend from $2.71 in FY22 to ~$4.75 in FY25. Promote-side analysts expect the corporate to put up over 26% Y/Y EPS development in FY24 and FY25. I imagine it’s achievable given the upcoming ramp-up of HomeSafe Alliance work, IRA stimulus-driven demand, long-term secular drivers, inorganic development prospects, in addition to margin enchancment from combine shift and working leverage. Given the corporate’s robust development prospects, I discover the present valuation low cost and imagine KBR inventory can proceed its outperformance.