Wednesday, June 4, 2014

KBR, Inc.

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 5 years (5yr revenue trend of -11.5%), however amid falling revenues gross margin has increased. KBR is making a larger percentage of gross profit from their 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 have decreased dramatically.  

KBR has also been buying back shares for the past 5 years, an increasing gross margin amid falling revenues and buying back shares makes KBR an attractive look.


Balance Sheet
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 (5yr growth rate of 22.04%) showing that they are profitable and they are 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 (5yr growth rate of 4%).

Growth Potential
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 200-400% higher in the rest of the world so there’s a rush to build LNG export facilities so we can sell to Europe, Asia and elsewhere. Only 6 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 $200B. This is good news for KBR because it earns approximately 40% of its revenue building LNG facilities.

KBR has been awarded 2 new LNG contracts one by Maersk Oil for topsides front end engineering and design (FEED) for the Culzean Project, the other by Gulf LNG Liquefaction Company to FEED engineering and Federal Energy Regulatory Commission (FERC) report pre-filing services to support the addition of ten 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) is another company that has leverage here as well however the stock is pricey and 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.

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