Don’t Sweat KBR’s Scare: Construction & Engineering Stocks Are Fine

by James Brumley | January 16, 2013 8:54 am

Last week, the construction and engineering sector got a little bit of a scare when KBR (NYSE:KBR[1]) took a roughly 8% hit after the company dialed down its 2012 profit outlook and reeled in 2013’s forecasts.

Specifically, KBR is now looking for an operating profit between $1.95 and $2.10 per share for fiscal 2012. That’s well below prior average estimates of $2.66 and 2011’s per-share earnings of $3.17.

The current year’s outlook isn’t any more compelling. The pros were looking for a profit of around $2.95 per share, but the company said something between $2.45 and $2.90 was more plausible. It’s not like KBR is simply sandbagging itself, either, just so it can look good when it comes time to report results. While the organization tends to top estimates more often than not, it doesn’t have a super-reliable history of beats.

The culprit(s)? The usual suspects, like high labor costs, customer delays and (reportedly) more writedowns in the lineup. While the impending accounting charges don’t reflect the operating income forecasts cited above, they’re still nagging problems that still at least indirectly put a drag on focus and resources.

Given just those details, it would be easy for an investor to conclude KBR was in some significant trouble. It also would be easy to extrapolate that the entire construction/engineering segment was feeling some pressure. Indeed, it would even be easy to assume this was a red flag pointing toward bigger economic trouble like a recession.

Fortunately — or unfortunately, depending on how you’re positioned — there’s more to the story.

The Rest of the Story

If infrastructure-type contracting is drying up, someone might want to tell Jacobs Engineering Group (NYSE:JEC[2]). It was awarded a deal by Reliance Industries on Tuesday to provide engineering and logistics services for a new refinery in India. The news came just a few minutes after Jacobs Engineering Group said it also had been awarded a contract by the Texas Department of Transportation to design 6 miles’ worth of road near Fort Worth. News of that deal came before the dust had settled on a contract Jacobs won last week — a $1.37 billion deal with NASA to support Kennedy Space Center.

All told, Jacobs Engineering has made four deals in just the first two weeks of the year. It doesn’t exactly scream that the market’s tightening its pursestrings across the board.

Peer and competitor The Shaw Group (NYSE:SHAW[3]) — soon to be folded into Chicago Bridge & Iron (NYSE:CBI[4]) — isn’t exactly struggling, either. The outfit may have posted a 9.8% dip in revenue last quarter, but it topped profit estimates of 39 cents per share by earning 44 cents. And, were Shaw not going to merge with CB&I, the pros were predicting a 52% increase in per-share profits in fiscal 2014.

And KBR?

Even though there’s no way to deny that KBR has seen better days, shareholders — long-term shareholders, anyway — actually have a great deal to look forward to.

One of those obscure bullish details is the backlog of work that KBR has been contracted to do, but has yet to perform. That backlog now totals nearly $15 billion. That’s not bad for a $4.3 billion organization that has generated revenue of $8 billion in the past four quarters. Granted, it doesn’t look like that beefy backlog is going to be whittled down a great deal by work that’s going to be performed in 2013. It’s still on the horizon, though, and KBR will certainly win at least some new contracts in the meantime.

In other words, even if it’s the weakest sister among the C&E firms right now, investors still could do worse than KBR. And there’s nothing in any of the data that suggests infrastructure spending is on the decline.

Bottom Line

If there was ever really any threat to heavy-construction spending — and that’s a big if — then it most likely stemmed from worries that the United States would be allowed to fall off the fiscal cliff. Even then, though, things like road projects, power plants and airports are planned years in advance and require years of planning. Moreover, most of those customers are government administrations with virtually unlimited funding.

The fiscal cliff fears were a relatively recent phenomenon, and only applied to organizations that actually had to pinch pennies. So, even that temporary kibosh can’t really be called a drag on the C&E industry.

In other words: If there’s a certain construction and engineering stock you like, don’t sweat owning it.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

Endnotes:

  1. KBR: http://studio-5.financialcontent.com/investplace/quote?Symbol=KBR
  2. JEC: http://studio-5.financialcontent.com/investplace/quote?Symbol=JEC
  3. SHAW: http://studio-5.financialcontent.com/investplace/quote?Symbol=SHAW
  4. CBI: http://studio-5.financialcontent.com/investplace/quote?Symbol=CBI

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