On Tuesday, Citi updated its outlook on KBR, Inc. (NYSE: NYSE:KBR), raising the price target to $82 from $76 while sustaining a Buy rating on the stock. The adjustment reflects the firm's analysis of the company's growth potential and current business dynamics.
KBR is anticipated to experience significant growth in the coming years, with mid to high teens EPS growth expected in 2025 and 2026. This optimism is tempered by some concerns, including a slowdown in certain business areas.
Delays in Middle East and Clean Energy-focused projects, along with slower-than-expected ramp-up in projects like HomeSafe, are notable. HomeSafe movements are still in the hundreds, whereas the full run rate in the U.S. is projected to be around 300,000.
The company's Government Services (GS) segment is expected to show resilient top-line growth in 2024, supported by a healthy backlog of approximately $12.9 billion as of the second quarter of 2024.
KBR's exposure to defense and government services is likely to drive continued top-line growth, with low double-digit growth modeled for 2025 and 2026. This is underpinned by a generally constructive defense spending environment.
The slow ramp-up of the HomeSafe contract is a point of focus due to its potential impact on earnings. However, the recent acquisition of LinQuest is seen as a positive move that could help KBR achieve its long-term top-line growth target of 11-15% in the GS segment and improve its business mix due to LinQuest's relatively higher margin profile.
In the Sustainable Technology Solutions (STS) segment, near-term bookings may face pressure, with a book-to-bill ratio of less than 1x. Nevertheless, KBR's selection for the Lake Charles LNG transformation project could potentially offset earnings from other projects, such as Plaquemines, should they proceed.
Finally, Citi notes that KBR's capital deployment optionality, which is not factored into its long-term revenue goal of over $11.5 billion or its earnings goal of more than $1.15 billion in adjusted EBITDA by 2027, could enhance the likelihood of the company meeting these targets.
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