KBR Stock: I Need Evidence That Revenues Will Grow At Double-Digits (NYSE:KBR)

Introduction

KBR, Inc. (NYSE:KBR) has reported Q2 earnings somewhat recently, and its share price has retreated from a recent high, so I wanted to look over some of those numbers and give some comments on the company’s performance going forward. I am skeptical about the potential that the company will be able to achieve, according to analysts. Therefore, I am remaining on the sidelines for now.

The first time I covered the company was back in January 2024, when I argued that margins may not experience much improvement due to government contracts. Since then, the company has returned slightly lower performance against the S&P 500 (SPY).

The company’s backlog provides a lot of visibility, which will help its share price not fluctuate too much because investors like visibility, however, I am still not convinced.

Briefly on Q2 Results

KBR’s top line came in at $1.86B, up 6.3% y/y and a slight miss of $20m vs. consensus estimates. Non-GAAP EPS came in at $0.83, a beat of $0.04 vs. consensus estimates. The company’s backlog decreased slightly since reporting its Q1 results, down $700m at $20.1B. On top of these results, the management was confident enough to raise FY24 numbers slightly. The management raised the bottom range of adjusted EBITDA from $810m to $825m now the range is $825m to $850m, and diluted EPS has been updated from $2.88-$3.08 to $2.94-$3.09, while also raising the bottom range of adjusted EPS by 5 cents to $3.15.

So, it seems the management is more confident in the efficiency initiatives than they were just last quarter, which is a good sign. However, the mixed bag of results and the raise, which wasn’t as impressive, didn’t convince investors, as the company’s share price took around 4.5% hit on the day and is now down around 12% since the report. The report isn’t the only reason it went down, I believe. The markets have been experiencing a lot of volatility across the board, which brought many stocks down, but if the report had been a bit better, it would have been affected less, in my opinion.

Overall, as I alluded to, it was quite a mixed bag of results. A raise is always good to see, but it wasn’t enough, in my opinion. I would have liked to see the backlog continue expanding or at least remain the same from Q1. Nevertheless, the backlog still provides a decent view of the company’s operation, which is almost three years’ worth of revenues.

Comments on the Outlook

Since the company is not in my portfolio for now, I haven’t been paying too much attention apart from the company’s quarter results. However, since it is on my watch list, I have noticed the company has been very busy. Multiple times per month, I see the company’s name pop up here on Seeking Alpha because it keeps winning contracts all around the world, particularly within the US government. Contracts going for as little as $60m to quite an impressive $771m. The ability to win so many contracts throughout the year speaks volumes about the company’s expertise and prowess when it comes to securing them. Even if these contracts may seem small and don’t reach $100m, if the company continues to secure smaller ones at a faster pace, they will eventually add up. A sprinkle of some big-ticket contracts will make sure the company’s backlog remains robust for years to come.

One thing I have noticed when it comes to companies that show a backlog is that investors appreciate a decent view of the company’s health in terms of upcoming revenues. $20B is a very healthy backlog, I would say, and if the company can continue its efforts to win contracts, I don’t see why investors wouldn’t continue to bid up the company’s share price. Investors like predictability. Is a decline of $700m over the quarter worrisome? I wouldn’t say so. I would like to see a few more quarters before concluding whether the company’s backlog is in trouble or if it experienced a hiccup and the business will continue to win contracts going forward, as it has in the past.

Moving on, I would like to go through some of the company’s M&A efforts. In the past three years, the company has not been too active in that regard, which I think may have been a missed opportunity to improve the company’s top-line potential, which I will also talk about in a little while. In the past three years or so, the company acquired, I believe, three companies and a technology called Acetica. That is meant to help the company’s petrochemical value chain and create a profitable way for CO2 utilization by back-integrating CO2 from carbon capture, which then will produce chemicals like Vinyl Acetate Monomer, or VAM. VAM is essential in sustainable coatings, adhesives, and many other applications that support a greener future where zero emissions are concerned. This is one of the older acquisitions, so it is difficult to put a number on how well this technology is doing because it would already be marked as organic growth within the Sustainable Technology business segment.

The other three acquisitions were of companies, VIMA Group, Frazer-Nash Consultancy, and the latest acquisition, LinQuest, helped KBR expand its reach across many areas. However, these were relatively tiny acquisitions, with LinQuest costing around $737m. We will not see anything reflected in Q3 results; however, I am expecting to hear some sort of guidance for Q4, and I wouldn’t be surprised if they raise it slightly. LinQuest has performed decently over the last year. It racked up $850m in contract awards, so there may be a decent bump to the company’s top line, but I would like to see how that looks when we get the final numbers post-acquisition.

Speaking of revenues, in the past decade, the company’s growth was, on average, 1%, 5-year CAGR stood at 5.4%, while 3-year CAGR at -2.6%. Not impressive at all, but it appears that the last two quarters are showing quite a different story, growing at about 7%. However, when I look at analysts’ estimates, I can see over 9% growth for FY24, which accelerates to 15% for FY25 and 12.5% for FY26. Do these numbers include the recent acquisition of LinQuest? Most likely, but I am not confident with these numbers until I see what LinQuest is going to contribute to the top line once everything has been sorted and integrated properly. Therefore, I am a bit more pessimistic when it comes to the company’s top-line potential for now. This is especially due to how much of a difference these numbers are compared to the company’s past performance. I know past performance doesn’t mean future certainty, but I haven’t seen anything that will prove we are going to see 15% growth in FY25. So, let’s look at an updated valuation model.

Valuation

As usual, I will keep it on the conservative end. That way, I am getting a bit more margin of safety. For revenues, I am fine with assigning around 8.5% growth since the company already guided for around $7.5B at the midpoint. However, I am not comfortable assigning 15% for FY25, since we don’t have enough information to show that to be the case. And I would like to be more on the conservative end anyway. For the model period, I went with around 5% CAGR over the next decade, which is already five times higher than what the company managed to achieve in the past decade.

For margins, the company relies on adjusted numbers more than GAAP, so I will stick to these sorts of margins also to keep it consistent. Do note that there is quite a large gap between adjusted and GAAP metrics. I don’t like using these numbers too much, but to make it slightly better for me, I am going to add more margin of safety.

For the discounted cash flow (DCF) model, as I mentioned, I will be adding a bit more margin of safety. I decided to add 2% on top of the company’s WACC of around 7% to get 9%, which is what I am using as my discount rate. I am sticking with 2.5% as my terminal growth rate. Additionally, with uncertainty about where the company’s backlog is heading for now and overall jitters in the markets, I am discounting the final intrinsic value by 30%. With that said, KBR’s intrinsic value is around $54 a share, which means the company is trading at a slight premium.

Closing Comments

My pessimism remains regarding KBR, Inc.’s performance, which I think may not be enough to boost its revenue to new levels. I would like to see what kind of revenues the recent acquisition attributed to the company’s top line before adjusting my expectations. For now, I am not too optimistic that the company will see 15% growth in FY25 without something drastically altering the way the company is operating.

Additionally, the risk of a recession is ever-present, which keeps me on the sidelines the most. I would like to see where we are headed over the next quarter and whether the US economy will experience some sort of downturn by the end of the year or early next year.