Morningstar | KBR Finishes 2018 With a Solid Fourth Quarter; Maintaining Fair Value Estimate
No-moat engineering and construction firm KBR posted another strong quarter, growing revenue by 42% compared with the same prior-year period. As fourth-quarter revenue and EPS were roughly in line with our expectations, we are maintaining our $21 per share fair value estimate. Management remains relatively upbeat about the outlook for the upcoming year and introduced guidance for full-year 2019 adjusted EPS to be in the range of $1.58 to $1.73. KBR is starting 2019 with strong momentum, as the firm’s backlog currently stands at roughly $13.5 billion (compared with $10.5 billion at the end of 2017).The government services segment delivered impressive 31% year-over-year organic revenue growth in the fourth quarter (17% for the year), driven by new wins as well as on-contract growth in the logistics business. Technology sales grew 12% from the same period last year due to high demand for petrochemical and refining technologies. Hydrocarbons services sales were down year over year, but the segment’s backlog remains stable and KBR recently announced it won an engineering, procurement, and construction services contract with ExxonMobil for a crude expansion project in Texas.
Overall, we think that the strong 2018 results are emblematic of CEO Stuart Bradie’s strategy of shifting the portfolio to rely more on differentiated government services through acquisitions of Wyle and Honeywell in 2016 and SGT in 2018. The government services segment now accounts for over 80% of the company’s backlog, which underscores management’s effort to derisk the portfolio by focusing on stable high-margin differentiated government services work.
KBR provides services and technologies across the asset and program life-cycle within the government services and hydrocarbons industries. The company has three segments: Government Solutions, which provides life-cycle support solutions to defense, space, aviation and other programs and missions for military and other government agencies; Technology Solutions, which combines technologies, equipment and catalyst supply, digital solutions and associated knowledge-based services into a global business for refining, petrochemicals, inorganic and specialty chemicals; and Energy Solutions, which provides life-cycle support solutions across the upstream, midstream and downstream hydrocarbons markets.
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