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Morningstar | KBR Reports Strong 2Q Results; We Increase Our FVE Modestly to $19. See Updated Analyst Note from 31 Jul 2018

We are raising our fair value estimate to about $19 per share from $18 for no-moat engineering and construction service provider KBR following solid second-quarter results and our updated full-year forecast, as well as the time value of money since our last update. Management increased its full-year EPS guidance range by a nickel at both ends to $1.40-$1.50. Our adjusted forecast incorporates a more optimistic 2018 forecast, which now lies at the upper end of management’s guidance that we view as conservative.

CEO Stuart Bradie updated the status of the Ichthys project, where KBR is a part of a contracting joint venture. This project is showing good progress, with only the power station in need of completion. Elsewhere in the company, the transition to government-related work continues, with that segment driving much of the earnings strength.

Adjusted second-quarter EPS of $0.34 compares with strong performance of $0.57 a year earlier. Companywide revenue increased about 20% to $1.3 billion due to a combination of organic growth and the impact of recent acquisitions. These healthy results were largely driven by growth in the government services segment, which reported 11% organic growth for the second quarter in a row. The technology segment reported flat revenue over a year earlier, with strong market conditions driving the gross profit margin higher to 30% from 24% a year earlier. By contrast, segment level results for hydrocarbon services were less encouraging, where revenue and gross profit figures were down from a year earlier. However, these results were in line with management expectations.

Results underscore CEO Stuart Bradie’s focus on reshaping the portfolio to emphasize differentiated government services, catalyzed by the Wyle and Honeywell acquisitions in 2016. KBR recently completed the acquisition of government services provider SGT, which we expect to boost its scientific, engineering, and IT software services portfolio.

This shift in focus also reflects a broader secular shift to a reliance on government services, which we expect to continue increasing its share of annual profits. This segment represents over 80% of the second-quarter backlog, although this figure is down sequentially due to temporary foreign exchange impacts.