KBR - KBR Inc.: Approaching Buying Levels

2023-11-06 20:01:12 ET

Summary

• KBR's Q3 FY23 results showed a rise in revenues and strong growth potential.
• The stock price is currently bearish, but this could present a buying opportunity in the future.
• The technical analysis suggests that the stock price may continue to fall in the near term.

The last time I wrote on KBR, Inc. (KBR) was in December 2022, and I mentioned that it had good growth potential but was overvalued then, and it turned out to be true. Its revenues have been growing, but its stock price is down by 5% since my last report. KBR recently posted decent Q3 FY23 results. I think its stock price is bearish, which can be a blessing in disguise as I believe its stock price is approaching buying level. Its financials and future growth potential look good, and a correction in the stock might create a good buying opportunity in the future. But for now, I assign a hold rating on KBR as the technical chart looks bearish.

Financial Analysis

KBR recently posted its Q3 FY23 results . The revenues for Q3 FY23 were $1.7 billion, a rise of 8.8% compared to Q3 FY22. A strong demand for its sustainable technology portfolio and strong new contract growth in its government solutions business were the main reasons behind the revenue growth. Its adjusted EBITDA in Q3 FY23 grew by 8.7% compared to Q3 FY22, and the margins were the same.

The company faced a non-cash charge of $114 million due to a convertible notes settlement. As a result, it posted a loss of $21 million, but if we ignore the charge, its net income in Q3 FY23 surpassed the Q3 FY22 income. KBR showed good growth in this quarter, and the demand it has been experiencing in recent times is quite strong. Its book-to-bill ratio [TTM] is 1.2x, and the orders received by them in Q3 FY23 are around $3.5 billion, which will ensure good numbers in the coming quarters as the orders received by them are multiyear orders. It is experiencing strong demand in recent times in both of its segments, and its backlog by the end of September 2023 stands at $17.2 billion, which was $15.5 billion in December 2022.

Technical Analysis

KBR is trading at the $50.7 level. The stock had a good run in the first half of 2023, but it started to fall in the second half. KBR is looking bearish, and it looks like profit booking has started in the stock after a good run. The reason I am saying it looks bearish is because the stock price broke the trendline in September that it has been followed since last year, and the retest has also been done in October. Whenever a retest has been done after a breakdown, the stock starts to move down quickly, and it is quite evident here. The stock price fell more than 11% in the last week, and the volume recorded in the last week was the highest in the last 17 months. So, it shows the stock is bearish, and investing at the current level might not be a good idea. The next support zone for the stock is at $42, and there is a high chance of it reaching there in the near term. And if it reaches the $42 level, one can start accumulating the stock for the long-term purpose. But right now, I think one should avoid it.

Should One Invest In KBR?

KBR reported decent results, but still, its share price is falling, which I believe is not bad. In fact, I think this can be a blessing in disguise because the recent breakdown and the share price approaching the support level might create an opportunity. The company is performing well, but it is currently trading at a higher valuation. KBR has a P/E [FWD] ratio of 17.63x, and its five-year average is around 16.91x. So, I believe the current valuation is still on the higher side. Hence, I believe one should wait for the stock price to correct further and reach the support zone of $42 before making fresh entries. Looking at the price movement, I think the stock is approaching the buying level, and looking at the strong backlog and solid demand the company is experiencing, I believe it can be a solid opportunity in the coming times. But for now, I assign a hold rating on KBR as I think its stock price might see a fall in the near term.

Risk

They use the cost-to-cost technique of revenue recognition to measure and recognize over time a sizable amount of their sales and profits. Due to their use of this accounting technique, revenues, and profits are recognized throughout a contract, usually based on the ratio of expenditures incurred thus far to total costs anticipated for the project's duration. When the amounts are known or can be reasonably predicted, the consequences of modifications to the estimated revenues and costs are documented. They also keep track of unapproved modification orders, client claims, and expected recoveries from supplier and subcontractor claims that have been factored into the project's estimated profit at completion. These figures could be revised at any time, and the changes could have a significant impact. Actual revenues and costs can differ considerably from their forecasts due to the uncertainties associated with forecasting the progress toward completion or the recoverability of claims of long-term contracts. This can include reductions or reversals of previously reported revenues and profits.

Bottom Line

Its quarterly result was decent, and the backlog has also increased. The company is experiencing solid demand and is looking good for the coming quarters. But I think waiting for some time might be a better option here as I believe its stock price might see a fall in the near term, which can create a buying opportunity. But for now, I assign a hold rating on KBR.

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