About the Business
KBR Inc. was incorporated in Delaware as an indirect wholly-owned subsidiary of Halliburton Company. The company is a global engineering, construction and services company supporting the energy, hydrocarbon, government services, minerals, civil infrastructure, power and industrial sectors. KBR offers a range of services through six business units: Government and Infrastructure, Upstream, Services, Downstream and Technology and ventures.
KBE has seen declining revenues over the past five years (five-year revenue trend of -11.5%); however, amid falling revenues, gross margin has increased. KBR is making a larger percentage of gross profit from its revenues despite seeing falling revenues.
- Gross margin 2009 = 6.3%, Revenue = $12,105 (in millions)
- Gross margin 2013 = 9.7%, Revenue = $7,420 (in millions)
Revenues have been falling consistently for the past five years because KBR was a major defense contractor active in the Iraq war. Since 2011 the revenue coming from the Iraq war has decreased dramatically.
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- KBR 15-Year Financial Data
- The intrinsic value of KBR
- Peter Lynch Chart of KBR
KBR's buying back shares for the past five years, increasing gross margin amid falling revenues makes KBR attractive.
KBR is holding on to $1.1 billion in cash. High amounts of cash are needed in the business due to working capital. KBR also only operates with $80 million in LT debt. KBR is not in trouble financially and has a very strong balance sheet.
Another more important item on the balance sheet is that KBR is growing its retained earnings (five-year growth rate of 22.04%) showing that it is profitable and able to fund expenditures and dividend payments through earnings that have been retained. Another important item on the balance sheet is that KBR is growing its total equity (the five-year growth rate is 4%).
KBR’s biggest growth potential is with the expected increase in the natural gas market. Wal-Mart, UPS, Coca-Cola, Pepsi and Waste Management are all switching their engines from diesel to natural gas-compressed (CNG) or liquefied (LNG) so they’re also building CNG and LNG fueling stations. In North America we can produce natural gas at a much cheaper price because we have so much of it, and we have the better techniques (fracking and horizontal drilling). Natural gas prices are 200% to 400% higher in the rest of the world, so there’s a rush to build LNG export facilities that can sell to Europe, Asia and elsewhere. Only six LNG export facilities have been approved since 2011, but there are more than 24 on deck.
The situation in Russia and Ukraine helps the U.S. position in the natural gas market. Russia supplies most of Europe with energy; every time Russia gets mad, it threatens to shut off the natural gas. If the U.S. could export our cheaper gas to Europe, it would cripple Russia. If enough Democrats get on board, LNG export facilities would be built at a much greater pace. In the long run it could represent a massive infrastructure build valued at more than $200 billion. This is good news for KBR because it earns approximately 40% of its revenue building LNG facilities.
KBR has been awarded two new LNG contracts: one by Maersk Oil for topsides front end engineering and design (FEED) for the Culzean Project, and the other by Gulf LNG Liquefaction Company to FEED engineering. Federal Energy Regulatory Commission (FERC) reports pre-filing services to support the addition of 10 million metric tons per year of liquefaction and export capabilities to the existing LNG import terminal located in Jackson Country, Miss.
McDermott International Inc. (MDR) would be another play on the expected natural gas production increase. Chicago Bridge & Iron Company N.V. (CBI) also has leverage here as well. However, the stock is pricey and one should wait for a pullback in value.
KBR is an undervalued company that has the potential for a turnaround. A low valuation that was based on two negative earnings surprises and an error with a financial statement causing a restatement have significantly devalued this company. However, this current low valuation, a clean balance sheet and a new CEO could mark the turnaround for KBR.