Engineering & Construction company KBR is standing out today, surging to $49.15 and marking a 6.6% change. In comparison the S&P 500 moved only 2.3%. KBR is -21.61% below its average analyst target price of $62.7, which implies there is more upside for the stock.
As such, the average analyst rates it at buy. Over the last year, KBR shares have outperformed the S&P 500 by 26.0%, with a price change of 8.6%.
KBR, Inc. provides scientific, technology, and engineering solutions to governments and commercial customers worldwide. The company is part of the industrials sector, which is considered cyclical. This means that sales revenues, and to some extent share prices, tend to increase during economic booms and then fall back to earth during busts. However, industrial companies can dampen this cyclical effect if they are invovled in multiple industries.
KBR's trailing 12 month P/E ratio is 49.1, based on its trailing Eps of $1. The company has a forward P/E ratio of 16.5 according to its forward Eps of $2.98 -- which is an estimate of what its earnings will look like in the next quarter.
As of the third quarter of 2022, the average Price to Earnings (P/E) ratio for US industrials companies is 21.46, and the S&P 500 has an average of 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (Eps), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.
We can take the price to earnings analysis one step further by dividing the P/E ratio by the company’s projected five-year growth rate, which gives us its Price to Earnings Growth, or PEG ratio. This ratio is important because it allows us to identify companies that have a low price to earnings ratio because of low growth expectations, or conversely, companies with high P/E ratios because growth is expected to take off.
KBR's PEG ratio of 1.45 indicates that its P/E ratio is fair compared to its projected earnings growth. In other words, the company’s valuation accurately reflects its estimated growth potential. The caveat, however, is that these growth estimates could turn out to be inaccurate.
To better understand the strength of KBR's business, we can analyse its gross profits, which are its revenues minus its cost of goods sold only. The extent of gross profit margins implies how much freedom the company has in setting the prices of its products. A wider gross profit margin indicates that a company may have a competitive advantage, as it is free to keep its product prices high relative to their cost.
KBR's gross profit margins have averaged 11.5% over the last four years. While not particularly impressive, this level of margin at least indicates that the basic business model of the company is consistently profitable. These margins are declining based on their four year average gross profit growth rate of -2.6%.
Another key to assessing a company's health is to look at its free cash flow, which is calculated on the basis of its total cash flow from operating activities minus its capital expenditures. Capital expenditures are the costs of maintaining fixed assets such as land, buildings, and equipment. From KBR's last four annual reports, we are able to obtain the following rundown of its free cash flow:
- 2021 free cash flow: $248,000,000.00
- 2020 free cash flow: $347,000,000.00
- 2019 free cash flow: $236,000,000.00
- 2018 free cash flow: $148,000,000.00
- Average free cash flow: $244,750,000.00 %
- Average free cash flown growth rate: 26.0 %
- Coefficient of variability (the lower the better): 33.3 %
With its positive cash flow, the company can not only re-invest in its business, it can offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in KBR have received an annualized dividend yield of 0.2% on their capital.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (market value divided by book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method.
KBR's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 4, so the company's assets may be overvalued compared to the average P/B ratio of the Industrials sector, which stands at 3.7 as of the third quarter of 2022.
KBR is by most measures fairly valued because it has an inflated P/E ratio, an average P/B ratio, and a steady stream of strong cash flows with an upwards trend. The stock has poor growth indicators because it has a an average PEG ratio and weak gross margins that are shrinking. We hope you enjoyed this overview of KBR's fundamentals. Make sure to subscribe to our free newsletter for daily equity reports.
