Why I Am Selling KBR in Spite of Its Impressive Quarter

Ironically, I am less impressed with KBR's (KBR) earnings than I am with Foster Wheeler's(FWLT), but the former is up and the latter is down. KBR actually missed on apples to apples continuing operations (28 cents vs 32 cents analysts)- but expectations were so low, I suppose the stock could rally. Typical. But I think the wrong company took the big hit. People only seem to look at headlines these days on Wall Street, not look at the numbers so they see a big "beat"....which is not accurate.

Backlog is solid, but only rose 5%. My worry with KBR is the focus in Iraq; while the company has been branching out into a lot of other areas to provide diversification its bread and butter is still Iraq. If... errr... when Obama gets elected, this could pressure the stock. But the trends are a bit troubling to me; profits are up, but full year revenue has been quite flat this year. On the positive side, due to Cheney connections I could see this company getting a lot of high level business opportunities, especially in the Middle East (i.e. Saudi Arabia)

Technically this is actually a chart that is improving as the stock broke back above its 50 day moving average in the past few days. But with the stock up from $30s to near $36 in just over a week, I am going to break one of my rules and sell a vastly improved chart. While the stock could continue to run, I don't see myself allocating much money to the name, so having a small stake in a name I have questions about probably doesn't make sense. So while I could see a run to $40, I just don't have enough skin in this game to make it worthwhile.

Again, if you take away the stock action all the numbers in the Foster Wheeler report were much more impressive to me (plus FWLT trades at a lower valuation)... but it's all about results vs expectations and KBR clearly had a lower bar to hurdle. So I am a bit mixed on how to treat this stock... but we'll sell for now and see how the next 3-4 quarters play out.

I am selling my 0.7% stake in KBR, 225 shares, in the low $36s. I've held KBR since August 10, 2007 as part of my large basket of infrastructure stocks - buying as low as the upper $20s and as high as low $40s; all in all I lost about $1500 on this position over the 6+ months, as the stock gave back all of its gains by mid January.

• Former Halliburton subsidiary KBR Inc. said Tuesday fourth-quarter profit rose 65 percent, lifted by contributions from natural-gas projects, work in Iraq and a tax benefit related to a 2006 asset sale.
• The Houston-based military contractor and engineering and construction firm said profit for the October-December period was $71 million, or 42 cents a share, up from $43 million, or 28 cents a share, in the prior-year period. The most-recent quarter included income from discontinued operations of $23 million, or 14 cents a share, due to tax benefits from the 2006 sale of its production services group. Wall Street expected KBR to earn 32 cents in the quarter, excluding one-time items.
• Revenue for the final three months of 2007 amounted to $2.4 billion, topping the Wall Street forecast of $2.27 billion. Revenue in the year-ago quarter was $2.3 billion.
• The company, which split from Halliburton last spring, said income from continuing operations amounted to $48 million, or 28 cents a share, versus comparable income of $45 million, or 30 cents a share, a year ago.
• KBR said operating income in the fourth quarter of 2007 was partially offset by $22 million in charges from potentially disallowable costs incurred under U.S. government contracts in the Middle East in 2003.
• KBR is probably best known for providing food and shelter to U.S. troops in Iraq, thought Utt has said the company is likely to continue to do less work in Iraq as troop levels decrease.
• KBR has announced several new contracts in the past year, both in the U.S. and overseas. They include a pact to manage construction of a chemicals and plastics production complex in Ras Tanura, Saudi Arabia -- a plant that's expected to be among the world's largest petrochemical facilities.

Disclosure: Long Foster Wheeler in fund and personal account

Comments

[User 158211:]

I love you guys who let ideology influence your investment decisions.

By the way, if you think that 225 shares represents a 0.7% stake in KBR, you need to go back to grade school for math lessons.

2008 Feb 28 09:50 AM

[TraderMark:]

Hi, 225 shares is the portion of my portfolio. KBR made up 0.7% of my portfolio. So I am not sure what you mean by your 2nd part of the comment.

2008 Feb 28 11:31 AM

[User 158211:]

Sorry, I guess it is grammar school that is needed, not math.

Roughly - 225 shares at ~$36 per share = $8,100. $8,100 = 0.7% of portfolio = $1.2 million portfolio.

I find it hard to commit funds to a money manager who is only willing to committ 0.5% of his/her $1.2 million portfolio to a $15M mutual fund. But hey, that's just me.

2008 Feb 28 06:06 PM

[TraderMark:]

lol
I wish I had $1.2 M :)
the $1.2M is virtual!
I am only in my mid 30s, and had to pay for own expensive college, it would be hard for me to have acquired $1.2M considering I was living on my own and paying off college for quite a few years after with a "normal" job (not Wall St job that pays $300K a year) ;)

So the $8100 is part of the $1.14M virtual portfolio, run in methodology, to show thinking if I had a real one. If I had $1.2M I'd put it all in to get launched as quickly as possible. Unfortunately I live in the normal world with normal salary with normal expenses of life :) I will be putting a large sum of my personal investment into it, whatever they may be when the time comes!

2008 Feb 28 06:57 PM

[User 158211:]

well, good luck to you.

2008 Feb 28 11:36 PM

[BWSEZ:]

Cheney was a Halliburton man and did his best to ruin B&R.
HAL & Dresser merger combined MWK with B&R to form KBR.
Now that KBR is separate, there are no ties to HAL or Cheney.
The KBR brass is new and were never a part of HAL -from outside with more coming in all the time.

2008 Mar 02 07:00 PM