KBR Constructing Long-Term Value For Shareholders

Aug.26.11 | About: KBR, Inc. (KBR)

KBR (NYSE:KBR) is a leading global engineering, construction and services company supporting the energy, petrochemicals, government services and civil infrastructure sectors. The company is a leader in many of the growing end-markets it serves, particularly gas monetization, having designed and constructed, alone or with joint venture partners, more than half of the world's operating liquefied natural gas production capacity over the past 30 years.

KBR has been previously written on, but given that these are relatively dated (given recent market volatility and downward pressure), I thought I would research the company further to see what underlying value might be present.

For a more in-depth analysis of the company's financials, I would refer investors to KBR's 2010 annual report and also to review the comments in detail from the CEO's transcript on its Q2 2011 results.

KBR's CEO indicated that its business-unit income last quarter was up approximately 20% from the prior quarter and each of our business groups showed increases in income of 15% or more. As a result, and based on the company's outlook for the remainder of 2011, KBR raised its full-year 2011 earnings per diluted share guidance to a range of $2.60 to $2.85 per share, from its initial estimate earlier in 2011 of $2.05 to $2.30 per share (representing a 25% increase).

KBR operates across four key business unit segments: hydrocarbons; infrastructure; government and power (IGP); and services. A large component KBR's IGP work is based on support to defense operations abroad. In late June, KBR was awarded a participation in the $3.8 billion CENTCOM multiple award task order contract to support design, build and construction projects throughout CENTCOM's 20-country area of responsibility. KBR has already been awarded its first task order under this MATOC for construction of military facilities within Afghanistan. KBR anticipates a steady number of task orders being released within the next 60 days for projects ranging from $20 million to $100 million each. The breadth of this contract should help to offset reduced cash flow arising from decreased contracts in Iraq.

In hydrocarbons and infrastructure, a large amount of work is generated for KBR in Australia, as it was selected to provide engineering and design services for three coal seam gas pipelines to carry coal seam gas from Central Queensland to export facilities on Curtis Island. It will continue to have a steady stream of work in these fields given the depth and development of the mining industry in Australia.

At today's opening (August 26), KBR was trading at $26.67, and as I write the share price has increased by $1.35 (up 5.02%) on the back of news of being awarded a contract by Hyundai Heavy Industries, and an announcement of a KBR share buyback of 10 million shares. From the open price of $26.67, KBR is trading at a discount of $12.67 (32%) below its 52-week high of $39.34 per share. It has a market capitalization of 4.05 billion (down from 5.6 billion in April 2011), is trading on a PE ratio of 10.8 and is delivering earnings of 2.47 per share.

While its yield and dividend stream is low, financially its debt-to-equity ratio is low, and it is continuing to build a solid revenue stream for new projects. It is working to develop new cash flow in the Middle East to mitigate reduced work in Iraq, and it remains a market leader in construction within the hydrocarbon industry. I would look to buy KBR as a mid to long term inclusion in a investment portfolio with a 2-3 year outlook, seeking to draw gains through capital growth, and eventual increases in dividends as the company continues to grow its cash flow through expanding projects in IGP and hydrocarbon infrastructure projects.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.