KBR (KBR)

Government and sustainable technology solutions company KBR (NYSE:KBR) fell short of the market’s revenue expectations in Q4 CY2025, with sales falling 11.2% year on year to $1.89 billion. On the other hand, the company’s outlook for the full year was close to analysts’ estimates with revenue guided to $8.13 billion at the midpoint. Its non-GAAP profit of $0.99 per share was 4.4% above analysts’ consensus estimates.

Company Overview

Known for projects like the construction of Guantanamo Bay, KBR provides professional services and technologies, specializing in engineering, construction, and government services sectors.

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).

Reviewing a company’s long-term sales performance reveals insights into its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Unfortunately, KBR’s 6.3% annualized revenue growth over the last five years was mediocre. This wasn’t a great result compared to the rest of the industrials sector, but there are still things to like about KBR.

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 annualized revenue growth of 6% over the last two years aligns with its five-year trend, suggesting its demand was consistently weak.

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 $16.86 billion in the latest quarter and averaged 1.5% year-on-year declines over the last two years. Because this number is lower than its revenue growth, we can see the company hasn’t secured enough new orders to maintain its growth rate in the future.

This quarter, KBR missed Wall Street’s estimates and reported a rather uninspiring 11.2% year-on-year revenue decline, generating $1.89 billion of revenue.

Looking ahead, sell-side analysts expect revenue to grow 2.8% over the next 12 months, a deceleration versus the last two years. This projection doesn't excite us and suggests its products and services will face some demand challenges. At least the company is tracking well in other measures of financial health.

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

KBR was profitable over the last five years but held back by its large cost base. Its average operating margin of 6.7% was weak for an industrials business.

On the plus side, KBR’s operating margin rose by 6.7 percentage points over the last five years, as its sales growth gave it operating leverage.

In Q4, KBR generated an operating margin profit margin of 10.1%, up 3.4 percentage points year on year. This increase was a welcome development, especially since its revenue fell, showing it was more efficient because it scaled down its expenses.

We track the long-term change 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 is profitable.

KBR’s EPS grew at an astounding 17.7% compounded annual growth rate over the last five years, higher than its 6.3% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

Diving into KBR’s quality of earnings can give us a better understanding of its performance. As we mentioned earlier, KBR’s operating margin expanded by 6.7 percentage points over the last five years. On top of that, its share count shrank by 10.6%. These are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.

Like with revenue, we analyze EPS over a more recent period because it can provide insight into an emerging theme or development for the business.

For KBR, its two-year annual EPS growth of 17% is similar to its five-year trend, implying strong and stable earnings power.

In Q4, KBR reported adjusted EPS of $0.99, up from $0.91 in the same quarter last year. This print beat analysts’ estimates by 4.4%. Over the next 12 months, Wall Street expects KBR’s full-year EPS of $3.90 to grow 3.6%.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

KBR has shown mediocre cash profitability over the last five years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 5.3%, subpar for an industrials business.

Taking a step back, an encouraging sign is that KBR’s margin expanded by 2.9 percentage points during that time. We have no doubt shareholders would like to continue seeing its cash conversion rise as it gives the company more optionality.

KBR’s free cash flow clocked in at $51 million in Q4, equivalent to a 2.7% margin. This result was good as its margin was 1.9 percentage points higher than in the same quarter last year, building on its favorable historical trend.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

KBR’s management team makes decent investment decisions and generates value for shareholders. Its five-year average ROIC was 11.4%, slightly better than typical industrials business.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. KBR’s ROIC has increased significantly over the last few years. This is a great sign when paired with its already strong returns. It could suggest its competitive advantage or profitable growth opportunities are expanding.

KBR reported $500 million of cash and $2.83 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 $963 million of EBITDA over the last 12 months, we view KBR’s 2.4× net-debt-to-EBITDA ratio as safe. We also see its $158 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

It was great to see KBR’s full-year EBITDA guidance top analysts’ expectations. We were also glad its EPS outperformed Wall Street’s estimates. On the other hand, its revenue missed and its EBITDA fell slightly short of Wall Street’s estimates. Overall, this quarter could have been better. Still, the stock traded up 2.9% to $42.00 immediately following the results.

Before deciding whether to buy KBR or pass, we urge investors to consider business quality, valuation, and the latest quarterly results.

There are things to like about KBR. Although its revenue growth was mediocre over the last five years and analysts expect growth to slow over the next 12 months, its expanding operating margin shows the business has become more efficient. And while its backlog declined, its astounding EPS growth over the last five years shows its profits are trickling down to shareholders.

KBR’s P/E ratio based on the next 12 months is 10.1x. When scanning the industrials space, KBR trades at a fair valuation. If you trust the business and its direction, this is an ideal time to buy.

Wall Street analysts have a consensus one-year price target of $54.78 on the company (compared to the current share price of $42.00), implying they see 30.4% upside in buying KBR in the short term.