On Jan 22, 2014 we maintained our Neutral recommendation on
) owing to concerns about the company's sluggish third-quarter
However, the company is expected to benefit from potential in
the LNG market, thanks to the shale gas revolution. Nevertheless,
we are concerned about the company's drop in year-over-year
revenue due to low project activity.
Why the Reiteration?
On Oct 29, 2013, KBR posted third-quarter 2013 net income and
earnings per share of $24 million and 16 cents respectively. This
was a great improvement upon the year-ago quarter's net loss of
$81 million or 55 cents per share. However, earnings fell way
short of the Zacks Consensus Estimate of 71 cents.
Revenues came in at $1.8 billion compared with $2.0 billion in
the third quarter of 2012. These were also 10% lower than the
Zacks Consensus Estimate of $2.0 billion.
However, in the last 90 days since the company reported its
third-quarter earnings, the estimates for both fiscal 2013 and
2014 have declined sharply. In the last 90 days, the Zacks
Consensus Estimate for 2013 declined 5.6% to $2.52 and for 2014;
the estimates declined 11.3% to $2.76 a share.
The surge in shale gas revolution in North America is
generating promising opportunities for Liquefied Natural Gas
(LNG), ammonia and ethylene projects. KBR is benefiting from this
potential in the LNG market and has been receiving a steady
inflow of orders from the world's largest refineries as well as
oil and gas facilities.
Given the nature of KBR's operations, which primarily include
long-cycle projects, the company's robust backlog lends
visibility to its future revenue stream.
At the end of the third quarter, the company had a backlog of
$14.2 billion, reflecting an increase of 2.9% sequentially.
However, KBR's contracts are usually long-cycle in nature. The
business is dependent upon major construction projects or front
end engineering and design (FEED) contracts which take long to
complete. Therefore, unpredictable timing between the contract
win and payment results in fluctuations in cash flow and
This apart, KBR operates in a highly competitive environment
among companies that enjoy a strong brand name and reputation in
the energy, oil & gas and Industrials segments. In order to
keep up with its competitors, KBR needs to be constantly updated
about state-of-the-art construction procedures.
Currently, KBR retains a Zacks Rank #4 (Sell). However, some
better-ranked energy and utility stocks include
Quanta Services Inc
). All three carry a Zacks Rank #2 (Buy).
CRANE CO (CR): Free Stock Analysis Report
FLUOR CORP-NEW (FLR): Free Stock Analysis
KBR INC (KBR): Get Free Report
QUANTA SERVICES (PWR): Free Stock Analysis
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