A Cheap Play On The Continuing LNG Build Out

Aug.27.12 | About: KBR, Inc. (KBR)

The construction of large and expensive LNG plants is in the early innings of a multi-year build out globally. The growth in this type of facility construction is being driven by (A) continued expansion of natural gas production, (B) the disparity in prices between geographically regions, and (C) supportive financial markets allowing financing to be raised. Some 25 to 35 large projects are currently in planning or construction stage worldwide. Oil majors like Chevron (NYSE:CVX) are sinking tens of billions of dollars into developing these facilities and securing long term customers for their output. The other day I highlighted the case for Foster Wheeler (FWLT) as a beneficiary of this long term trend. Another cheap play in this space is KBR.

"KBR, Inc. (NYSE:KBR) operates as an engineering, construction, and services company worldwide. One of its primary businesses designs and constructs liquefied natural gas and gas-to-liquids facilities for the development and transportation; and delivers onshore and offshore oil and natural gas production facilities, including platforms, floating production and subsea facilities, and pipelines." (Business description from Yahoo Finance)

7 reasons to pick up KBR at $27 a share:
 

  1. The stock is cheap at less than 9 times forward earnings, a discount to its historical average (14.3).
  2. The median price target by the 13 analysts that cover the stock is $40 a share, some 50% above the current price of the stock. Price targets range from $35 to $48 a share.
  3. The company has a liquid balance sheet with over $700mm in net cash on the books (over 15% of current market capitalization).
  4. The company is selling near the bottom of its five year valuation range based on P/E, P/B and P/CF.
  5. KBR is expected to bounce back revenue wise in 2013, with sales growth expected to be just under 10% for FY2013. The company has beat earnings estimates five of the last six quarters.
  6. The company recently initiated a dividend of 20 cents a share on an annual basis. Given the company's strong balance sheet, robust cash flow and low payout ratio; I would look for dividend payouts to increase significantly over the coming years.
  7. The stock looks like it has bottomed recently off strong technical support at just below these levels and is now solidly above its 50 day moving average (See Chart)

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Disclosure: I am long CVX, FWLT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I may also go long on KBR over next 72 hours