Government and sustainable technology solutions company KBR (NYSE:KBR) met Wall Street’s revenue expectations in Q3 CY2024, with sales up 10% year on year to $1.95 billion. The company’s outlook for the full year was also close to analysts’ estimates with revenue guided to $7.6 billion at the midpoint. Its non-GAAP profit of $0.84 per share wasalso in line with analysts’ consensus estimates.
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KBR (KBR) Q3 CY2024 Highlights:
- Revenue: $1.95 billion vs analyst estimates of $1.95 billion (in line)
- Adjusted EPS: $0.84 vs analyst expectations of $0.84 (in line)
- EBITDA: $219 million vs analyst estimates of $215.1 million (1.8% beat)
- The company slightly lifted its revenue guidance for the full year to $7.6 billion at the midpoint from $7.55 billion
- Management slightly raised its full-year Adjusted EPS guidance to $3.25 at the midpoint
- EBITDA guidance for the full year is $855 million at the midpoint, above analyst estimates of $847.6 million
- Gross Margin (GAAP): 14.9%, up from 13.8% in the same quarter last year
- EBITDA Margin: 11.2%, in line with the same quarter last year
- Free Cash Flow Margin: 7.3%, up from 4% in the same quarter last year
- Backlog: $17.9 billion at quarter end, up 3.7% year on year
- Market Capitalization: $9.37 billion
"KBR's exceptional team has once again exceeded expectations with outstanding third-quarter results," stated Stuart Bradie, KBR's President and CEO.
Company Overview
Known for projects like the construction of Guantanamo Bay, KBR provides professional services and technologies, specializing in engineering, construction, and government services sectors.
Defense Contractors
Defense contractors typically require technical expertise and government clearance. Companies in this sector can also enjoy long-term contracts with government bodies, leading to more predictable revenues. Combined, these factors create high barriers to entry and can lead to limited competition. Lately, geopolitical tensions–whether it be Russia’s invasion of Ukraine or China’s aggression towards Taiwan–highlight the need for defense spending. On the other hand, demand for these products can ebb and flow with defense budgets and even who is president, as different administrations can have vastly different ideas of how to allocate federal funds.
Sales Growth
A company’s long-term performance can give signals about its business quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Unfortunately, KBR’s 5.9% annualized revenue growth over the last five years was tepid. This shows it failed to expand in any major way and is a rough starting point for our analysis.
We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. KBR’s recent history shows its demand slowed as its revenue was flat over the last two years.
KBR also reports its backlog, or the value of its outstanding orders that have not yet been executed or delivered. KBR’s backlog reached $17.9 billion in the latest quarter and averaged 7.9% year-on-year growth over the last two years. Because this number is better than its revenue growth, we can see the company accumulated more orders than it could fulfill and deferred revenue to the future. This could imply elevated demand for KBR’s products and services but raises concerns about capacity constraints. 
This quarter, KBR grew its revenue by 10% year on year, and its $1.95 billion of revenue was in line with Wall Street’s estimates.
Looking ahead, sell-side analysts expect revenue to grow 16.6% over the next 12 months, an acceleration versus the last two years. This projection is healthy and shows the market thinks its newer products and services will spur faster growth.
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Operating Margin
Operating margin is a key measure of profitability. Think of it as net income–the bottom line–excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.
On the bright side, KBR’s annual operating margin rose by 7.3 percentage points over the last five years.
This quarter, KBR generated an operating profit margin of 8.9%, in line with the same quarter last year. This indicates the company’s overall cost structure has been relatively stable.
Earnings Per Share
Analyzing long-term revenue trends tells us about a company’s historical growth, but the long-term change in its earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.
KBR’s EPS grew at a remarkable 14% compounded annual growth rate over the last five years, higher than its 5.9% annualized revenue growth. This tells us the company became more profitable as it expanded.
Diving into KBR’s quality of earnings can give us a better understanding of its performance. As we mentioned earlier, KBR’s operating margin was flat this quarter but expanded by 7.3 percentage points over the last five years. On top of that, its share count shrank by 6.3%. These are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth. 
Like with revenue, we analyze EPS over a shorter period to see if we are missing a change in the business. For KBR, its two-year annual EPS growth of 6.9% was lower than its five-year trend. We hope its growth can accelerate in the future.
In Q3, KBR reported EPS at $0.84, up from $0.75 in the same quarter last year. This print was close to analysts’ estimates. Over the next 12 months, Wall Street expects KBR’s full-year EPS of $3.13 to grow by 22%.
Key Takeaways from KBR’s Q3 Results
We were impressed by how significantly KBR blew past analysts’ backlog expectations this quarter. We were also glad its full-year EBITDA guidance exceeded Wall Street’s estimates. On the other hand, its revenue unfortunately missed. Overall, this quarter had some key positives. The stock remained flat at $70.40 immediately after reporting.
KBR had an encouraging quarter, but one earnings result doesn’t necessarily make the stock a buy. Let’s see if this is a good investment.We think that the latest quarter is only one piece of the longer-term business quality puzzle. Quality, when combined with valuation, can help determine if the stock is a buy.We cover that in our actionable full research report which you can read here, it’s free.
