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KBR (KBR) Research Report: Q1 CY2024 Update


Full Report / June 05, 2024

Government and sustainable technology solutions company KBR (NYSE:KBR) announced better-than-expected results in Q1 CY2024, with revenue up 6.8% year on year to $1.82 billion. It made a non-GAAP profit of $0.77 per share, improving from its profit of $0.67 per share in the same quarter last year.

KBR (KBR) Q1 CY2024 Highlights:

  • Revenue: $1.82 billion vs analyst estimates of $1.78 billion (2.1% beat)
  • EPS (non-GAAP): $0.77 vs analyst estimates of $0.70 (9.9% beat)
  • Gross Margin (GAAP): 14.5%, in line with the same quarter last year
  • Free Cash Flow of $66 million, similar to the previous quarter
  • Backlog: $17.25 billion at quarter end, up 4.4% year on year
  • Market Capitalization: $8.39 billion

With projects such as constructing Guantanamo Bay, KBR provides professional services and technologies, specializing in engineering, construction, and government services sectors.

KBR was initially established through the merger of two engineering and construction companies, Brown & Root and M.W. Kellogg. Over the decades, KBR has grown into a global leader, recognized for its contributions to landmark projects and its significant role in supporting military operations, exemplified by its involvement in constructing facilities like Guantanamo Bay. The company was created with the vision to tackle complex engineering challenges, delivering solutions across diverse industries, including energy, government services, and infrastructure.

Today, KBR offers services including consulting, project management, engineering, construction, and operations and maintenance. The company solves critical problems for its clients, such as developing sustainable energy solutions, modernizing government infrastructure, and managing large-scale projects in challenging environments. For example, KBR plays a role in space exploration efforts, supporting NASA's mission operations.

KBR's revenue sources are diversified across government and commercial contracts, with a significant portion from long-term agreements and repeat business. This diversification allows KBR to tap into revenue streams across various sectors, thus reducing reliance on any single market or customer.

Defense Contractors

Defense contractors typically require technical expertise and government clearance. Companies in this sector can also enjoy long-term contracts with government bodies, leading to more predictable revenues. Combined, these factors create high barriers to entry and can lead to limited competition. Lately, geopolitical tensions–whether it be Russia’s invasion of Ukraine or China’s aggression towards Taiwan–highlight the need for defense spending. On the other hand, demand for these products can ebb and flow with defense budgets and even who is president, as different administrations can have vastly different ideas of how to allocate federal funds.

Competitors focusing on the engineering, construction, and government services sectors include Jacobs Solutions (NYSE:J), Leidos (NYSE:LDOS), and SAIC (NYSE:SAIC).

Sales Growth

A company’s long-term performance can indicate its business health. Any business can put up a good quarter or two, but many enduring ones tend to grow for years. Over the last five years, KBR grew its sales at a mediocre 6.3% compounded annual growth rate. This shows it couldn't expand its business in any major way. KBR Total Revenue

Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. KBR's recent history marks a reversal from its five-year trend as its revenue has shown annualized declines of 3.5% over the last two years.

We can dig further into the company's revenue dynamics by analyzing its backlog, or the value of its outstanding orders that have not yet been executed or delivered. KBR's backlog reached $17.25 billion in the latest quarter and averaged 8.4% year-on-year growth over the last two years. Because this number is better than its revenue growth, we can see the company accumulated more orders than it could fulfill and deferred revenue to the future. This could imply elevated demand for KBR's products and services but also raise concerns about capacity constraints. KBR Backlog

This quarter, KBR reported solid year-on-year revenue growth of 6.8%, and its $1.82 billion of revenue outperformed Wall Street's estimates by 2.1%. Looking ahead, Wall Street expects sales to grow 9.2% over the next 12 months, an acceleration from this quarter.

Operating Margin

KBR was profitable over the last five years but held back by its large expense base. It demonstrated weak profitability for an industrials business, producing an average operating margin of 4.7%.

On the bright side, KBR's annual operating margin rose by 3 percentage points over the last five years.

KBR Operating Margin (GAAP)

This quarter, KBR generated an operating profit margin of 9.1%, in line with the same quarter last year. This indicates the company's overall cost structure has been relatively stable.

EPS

We track the long-term growth in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company's growth was profitable.

KBR's EPS grew at a remarkable 13.7% compounded annual growth rate over the last five years, higher than its 6.3% annualized revenue growth. This tells us the business became more profitable as it expanded.

KBR EPS (Adjusted)

Diving into KBR's quality of earnings can give us a better understanding of its performance. As we mentioned earlier, KBR's operating margin was flat this quarter but expanded by 3 percentage points over the last five years. On top of that, its share count shrank by 4.3%. These are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.

Like with revenue, we also analyze EPS over a more recent period because it can give insight into an emerging theme or development for the business. For KBR, its two-year annual EPS growth of 7.6% was lower than its five-year trend. We hope its growth can accelerate in the future.

In Q1, KBR reported EPS at $0.77, up from $0.67 in the same quarter last year. This print beat analysts' estimates by 9.9%. Over the next 12 months, Wall Street expects KBR to grow its earnings. Analysts are projecting its EPS of $2.95 in the last year to climb by 14.6% to $3.38.

Cash Is King

If you've followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills.

KBR has shown mediocre cash profitability over the last five years, putting it in a pinch as it gives the company limited opportunities to reinvest, pay down debt, or return capital to shareholders. Its free cash flow margin averaged 4.8%, subpar for an industrials business.

Taking a step back, an encouraging sign is that KBR's margin expanded by 2.6 percentage points during that time. We have no doubt shareholders would like to continue seeing its cash conversion rise.

KBR Free Cash Flow Margin

KBR's free cash flow clocked in at $66 million in Q1, equivalent to a 3.6% margin. This quarter's result was good as its margin was 2.7 percentage points higher than in the same quarter last year, but we wouldn't put too much weight on it because businesses' working capital needs can be seasonal, causing quarter-to-quarter swings.

Return on Invested Capital (ROIC)

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was its growth capital-efficient? A company’s ROIC explains this by showing how much operating profit a company makes compared to how much money it has raised (debt and equity).

KBR's five-year average ROIC was 7.3%, somewhat low compared to the best industrials companies that consistently pump out 20%+. Its returns suggest it was mediocre at investing in profitable business initiatives.

KBR Return On Invested Capital

The trend in its ROIC, however, is often what surprises the market and moves the stock price. Unfortunately, KBR's ROIC has stayed the same over the last few years. If the company wants to become an investable business, it must improve.

Balance Sheet Risk

Debt is a tool that can boost company returns but presents risks if used irresponsibly.

KBR reported $314 million of cash and $1.86 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company's debt level isn't too high and 2) that its interest payments are not excessively burdening the business.

With $772 million of EBITDA over the last 12 months, we view KBR's 2.0x net-debt-to-EBITDA ratio as safe. We also see its $89 million of annual interest expenses as appropriate. The company's profits give it plenty of breathing room, allowing it to continue investing in new initiatives.

Key Takeaways from KBR's Q1 Results

We were impressed by how significantly KBR blew past analysts' operating margin expectations this quarter. We were also excited its revenue outperformed Wall Street's estimates. Overall, we think this was a strong quarter that should satisfy shareholders. The stock is flat after reporting and currently trades at $62.37 per share.

Is Now The Time?

KBR may have had a good quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.

We appreciate companies solving complex business problems, but in the case of KBR, we'll be watching from the sidelines. Its revenue growth has been mediocre over the last five years, but at least growth is expected to increase in the short term. And while its projected EPS for the next year implies the company's fundamentals will improve, the downside is its relatively low ROIC suggests it has historically struggled to find profitable business opportunities. On top of that, its operating margins are low compared to other industrials companies.

KBR's price-to-earnings ratio based on the next 12 months is 18.5x. While one can find things to like about KBR and its valuation is reasonable, we think there are better opportunities elsewhere in the market.

Wall Street analysts covering the company had a one-year price target of $73.68 right before these results (compared to the current share price of $62.37). Readers should still exercise caution as analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other lucrative business lines. As a result, they typically hesitate to say bad things for fear they will lose out on other business. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.

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