LinQuest Acquisition Will Expand Capabilities In Military Space And Digital Engineering

Key Takeaways

• LinQuest acquisition enhances KBR's capabilities, driving revenue growth and future earnings synergies in military space and digital engineering.
  
• Strategic projects with companies like Aramco and focus on new technologies boost revenue, aligning with high-margin offerings.
  
• Economic uncertainties, integration challenges, and geopolitical risks may impact KBR's revenue, margins, and project execution across various segments and regions.

Catalysts

Provides scientific, technology, and engineering solutions to governments and commercial customers worldwide.

• The integration of the LinQuest acquisition is progressing well, contributing significantly to KBR’s expanded capabilities in military space and digital engineering, which is anticipated to enhance revenue growth and drive future earnings synergies.
  
• KBR's strategic projects, including the significant contracts with Aramco and future ramp-up in projects like LNG and sustainable technologies, are expected to substantially increase revenue and contribute to long-term earnings targets.
  
• Increased book-to-bill and strong bookings across the STS and Government Solutions segments provide a solid foundation for sustained revenue growth, supporting higher revenue and profitability.
  
• The involvement in new technologies, such as sustainable aviation fuel and plastics recycling, offers KBR potential new revenue sources and aligns with higher-margin offerings, benefiting both revenue and net margins.
  
• The disciplined approach to risk management in securing new contracts, particularly in the LNG space, ensures sustainable revenue growth and improved net margins by focusing on high-value, low-risk projects.

KBR Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming KBR's revenue will grow by 15.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.3% today to 7.1% in 3 years time.
• Analysts expect earnings to reach $805.8 million (and earnings per share of $6.27) by about January 2028, up from $319.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.9x on those 2028 earnings, down from 24.1x today. This future PE is lower than the current PE for the US Professional Services industry at 24.1x.
• Analysts expect the number of shares outstanding to decline by 1.2% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.92%, as per the Simply Wall St company report.

KBR Future Earnings Per Share Growth

Risks

• The potential impact of global economic uncertainties, such as changes in energy demand or pricing fluctuations, could affect the revenue generated from projects in the Middle East and other regions.
  
• Concerns regarding the integration of LinQuest and extracting expected synergies may impact net margins if cost expectations are not met.
  
• Delays in energy transition projects, especially if influenced by election outcomes in the U.S., could slow down the anticipated growth in STS, affecting both revenue and earnings projections.
  
• Operational challenges or geopolitical risks in regions like Saudi Arabia could lead to suspensions or cancellations of projects, impacting future revenue streams and earnings stability.
  
• Prolonged reliance on continuing resolutions in the U.S. defense budget could delay government contract awards, impacting revenue recognition in the Government Solutions segment.

Valuation

• The analysts have a consensus price target of $76.7 for KBR based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $11.4 billion, earnings will come to $805.8 million, and it would be trading on a PE ratio of 14.9x, assuming you use a discount rate of 6.9%.
• Given the current share price of $57.81, the analyst's price target of $76.7 is 24.6% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.