KBR Earnings: 2023 Outlook Maintained but HomeSafe Likely to Ramp Slower Than Expected in 2024

We’ve lowered our fair value estimate for KBR to $62 from $64 after the company reported third-quarter results. The fair value adjustment reflects our more muted revenue growth projections for 2024 and 2025, partially offset by the time value of money.

KBR grew its third-quarter organic revenue by 9% from the prior-year period, driven by 4% growth in government solutions and 28% growth in sustainable technology solutions. Management maintained its full-year 2023 outlook and continues to anticipate revenue of $6.9 billion to $7.1 billion, adjusted EBITDA of $730 million to $750 million, and adjusted EPS of $2.76-$2.96. KBR delivered a 1.2 times book/bill ratio and grew its backlog to $21.8 billion, up from $19.8 billion in the same period last year. We are confident that KBR can reach its 2023 targets as over 95% of the work required to reach management’s guidance is already under contract.

While KBR maintained its 2023 outlook, management said on the earnings call that the HomeSafe contract will likely ramp slower in 2024 than originally expected. For 2024, the company expects potential lower EBITDA contributions from HomeSafe to be offset by outperformance in the sustainable technology solutions segment. Nonetheless, uncertainty about the pace of the HomeSafe ramp, coupled with headwinds due to higher interest rates, will likely make the 2025 EPS target of $4.75 challenging to reach.

We remain optimistic about the long-term outlook for KBR, as we continue to expect the company to capitalize on favorable secular trends, including growing demand for sustainable solutions in areas such as hydrogen, ammonia, and plastics recycling. That said, we expect uncertainty regarding the pace of the HomeSafe contract ramp to weigh on shares. The stock fell by over 13% following the earnings release, sending it into 4-star territory, and we now see KBR as modestly undervalued.