Morningstar | We Maintain Our $21 FVE and No-Moat Rating for KBR
We are maintaining our $21 fair value estimate for engineering and construction firm KBR and reiterating our no-moat and stable moat trend ratings. We currently view the stock as fairly valued, with shares trading in 3-star territory.We believe that most E&C firms, including KBR, lack economic moats due to an unfavorable industry structure. A fragmented industry, powerful customers, and the prevalence of projects with standardized specifications lead to intense price-based competition and limited opportunities for differentiation. Industry cyclicality and the risk of negative events, such as cost overruns and legal disputes, have historically driven relatively volatile returns on invested capital, and we don’t expect that to change. In the long run, we forecast KBR to earn average returns on invested capital roughly in line with its cost of capital.
KBR ended 2018 on a strong note, delivering 42% year-over-year growth for the fourth quarter and 18% for the full year. CEO Stuart Bradie’s strategy of rebalancing KBR’s portfolio toward differentiated government services, represented by the acquisitions of Wyle and HGST in 2016 and SGT in 2018, is starting to bear fruit. The government services segment currently constitutes over 80% of the company’s strong $13.5 billion backlog (compared with $10.5 billion at the end of 2017), and we expect the shift to long-term government contracts to result in a more stable portfolio.
On the hydrocarbons services side of the business, we think KBR will benefit from a gradual resurgence of activity on LNG projects. We anticipate a ramp-up in investments in LNG projects over the next few years to meet growing demand. Considering KBR’s expertise, track record, and recent LNG wins, we expect the firm to capture its fair share of LNG opportunities.
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.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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