KBR, Inc. (KBR): 3Q weaker than expected; strong pipeline keeps us constructive - Goldman Sachs - 11/02/07
What's changed
KBR reported weaker than expected 3Q2007 earnings, driving a 7% decline in the share price. Total operating profit of $78 million (excluding one-time items) was 10% lower than our $87 million estimate due to an unanticipated sequential decline in E&C earnings. Management attributed the winding down of Bonny Island Train 6 project activity as a key factor, tempering our earnings outlook during the next six months. However, given rising energy prices and a robust pipeline of potential large awards, we remain confident of the long-term earnings trajectory. Accordingly, we are raising our normalized earnings estimate to $1.93 from $1.81 and raising our 6-month price target to $43 from $40.
Implications
3Q2007 results were somewhat disappointing, but we did not see anything that tempers the long-term outlook. In our view, the energy infrastructure spending cycle appears to be only getting longer and KBR should remain a primary beneficiary. Near-term, however, the shares could be choppy as new major award activity including Bonny Island Train 7 is likely to be pushed out until Spring 2008. KBR continues to increase its emphasis outside of LNG to reduce lumpiness, including North American O&M and construction, though we expect only gradual near-term progress. We are maintaining our 2008 EPS estimate of $1.61 on higher forecasted Iraq revenue given delays in LogCAP IV and a more back half loaded earnings ramp on anticipated new award activity. We remain Neutral rated on a relative basis within our E&C coverage universe.
Valuation
Our 6-month $43 price target (up from $40) assumes 22x our new normalized EPS estimate of $1.93.
Key risks
The key risks to our price target are a decline in oil prices, cost overruns, and lower-than-expected new award activity/margin expansion. |
