KBR - 1Q2007: Near-term Gas Monetization outlook remains cautious May 07, 2007
Goldman Sachs
What's changed
We are maintaining our Neutral rating on the back of KBR’s 1Q2007 earnings release. The quarter was in-line with our expectations, but management continues to remain cautious on the near-term outlook of gas monetization awards following project delays and some competitive losses. To reaccelerate backlog growth, KBR is increasing the focus on N. American O&M and construction work.
Implications
Despite efforts to diversify end markets in the E&C segment, we still view the Gas Monetization business as the key driver of KBR shares. KBR is the historical market leader in LNG, but questions remain on (1) how quickly or successfully KBR can ramp up in the new areas of focus and (2) the ultimate size of the opportunity for KBR, particularly given what could be a meaningful percentage of the workforce specialized in gas monetization. We are reducing our 2007 EPS estimate to $1.01 from $1.09 on a higher tax rate this year while our below-consensus 2008 EPS estimate moves to $1.20 from $1.27. The existing backlog should support our 2007 estimates, though we are assuming a pick-up in award activity to meet our 2008 estimate. We see downside to our 2008 EPS estimate if KBR is unable to win at least one large gas monetization project award this year. We continue to see other E&C names that offer more compelling risk/reward, including CB&I, Foster Wheeler, and Jacobs Engineering.
Valuation
We are maintaining our 6-month price target of $22, based on comparative valuation, normalized earnings, and our correlation of EV/IC versus ROIC.
Key risks
Key risks to the downside include lower energy prices, a lack of new E&C awards, cost overruns on fixed-price contracts, and a larger than expected decline in Middle East revenue. Risks to the upside include greater-than-expected new award activity or revenue from military services activity. |
