Nothing exemplifies the evolution of the economy — from energy to technology — better than the story of KBR (NYSE:KBR). In fact, KBR stock is a prime example.
KBR originally stood for Kellogg, Brown & Root, significant names in the 20th century energy industry. For instance, during the Giant years of the 1950s, Brown & Root was the main contractor to call into oilfields. What’s more, the Brown family name is even all over my alma mater, Rice University — the company actually the built our football stadium.
All that is to say that the Browns were one of the greatest American entrepreneurial stories of their time. And, in recently exiting the energy business, KBR has now made one of the greatest executive turns of the early 21st century.
That’s all due to CEO Stuart Bradie — I wonder what the Browns would have made of him.
A New Phase for KBR Stock
In 2020, CEO Stuart Bradie led KBR’s exit from the fixed-price energy construction business. Instead of the old business, Bradie said that the new KBR will focus on government services and technology.
This is a massive change. Energy services contracts, including liquified natural gas (LNG) terminals, had been 75% of the company’s business as recently as 2015. On top of that, the company had been a part of Halliburton (NYSE:HAL) — the oil field services giant — up until 2007.
But KBR followed its energy announcement in August by buying Centauri, a military technology contractor, for $800 million. In the company’s second-quarter report, Bradie said about the shift to its two new areas of focus:
“The transformation of our operating model greatly simplifies our business and allows us to further reduce risk and narrow our strategic focus. We continue to move upmarket into differentiated areas that provide attractive returns, consistent growth and strong cash conversion.”
Bradie came in as the CEO of KBR back in 2014, moving from the Australian energy and chemicals company Worley (OTCMKTS:WYGPF). He began the move out of energy when that business was at its peak, growing KBR’s government services unit through acquisitions like Honeywell’s (NYSE:HON) technology solutions business.
Now, he says KBR has achieved carbon neutrality and plans to be net-zero in carbon by 2030. Moreover, the “achievement of the company’s [environmental, social and governance] ESG goals” are now tied to its executive compensation plan.
So far, it seems that these changes are going well. Instead of building LNG plants, KBR is now analyzing satellite data for the U.S. Geological Survey. It’s also the advisor for a hydrogen project in South Korea. Plus, it’s winning contracts on plastic recycling and carbon recycling. This could all be great news for KBR stock.
By the Numbers
However, none of this will matter if the company can’t do it at a profit.
KBR stock entered trade on Jan. 22 at about $30.54 per share. That’s a market cap of about $4.38 billion, on what should be 2020 revenues of $5.82 billion.
Of course, operations were hit hard by the pandemic and oil crash, so the company will likely report a loss for all of 2020. But KBR did make $52 million in net income for the third quarter, with revenue of nearly $1.4 billion, just $46 million short of what it did a year earlier. Moreover, analysts expect KBR to earn about 48 cents per share for the fourth quarter, on revenue of $1.5 billion.
At the end of September, KBR reported $1.47 billion of long-term debt and $949 million in cash. However, as part of the transition, Bradie replaced the letter of credit system KBR had used for debt with a revolving credit facility that lets it borrow up to nearly $1.8 billion.
The Bottom Line
There’s no denying it: Bradie began executing his turn from the top of the energy curve and got his company and KBR stock out just as the market was crashing.
Plus, in his third quarter report, Bradie noted $269 million in operating cash flow through September, solid margins of 9% and increased cash and earnings guidance for the full year. He dubbed the Centauri acquisition “highly strategic.”
Essentially, this CEO has turned an energy engineering firm into a technology services business against a backdrop of slowly falling energy prices. The company today is fully valued, maybe a little overvalued based on cash flow. But that doesn’t mean it should fall off your radar.
And Stuart Bradie is still just 54. When it comes to KBR, I can’t wait for his next trick.
On the date of publication, Dana Blankenhorn did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn.