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Government and sustainable technology solutions company KBR (NYSE:KBR) fell short of analysts' expectations in Q2 CY2024, with revenue up 5.8% year on year to $1.86 billion. On the other hand, the company's outlook for the full year was close to analysts' estimates with revenue guided to $7.55 billion at the midpoint. It made a non-GAAP profit of $0.83 per share, improving from its profit of $0.74 per share in the same quarter last year.
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KBR (KBR) Q2 CY2024 Highlights:
- Revenue: $1.86 billion vs analyst estimates of $1.88 billion (1.1% miss)
- EPS (non-GAAP): $0.83 vs analyst estimates of $0.79 (4.7% beat)
- The company reconfirmed its revenue guidance for the full year of $7.55 billion at the midpoint
- EBITDA Guidance for the full year is $837.5 million at the midpoint, in line with analysts' expectations
- Gross Margin (GAAP): 14.6%, up from 14.3% in the same quarter last year
- Free Cash Flow of $160 million, up 142% from the previous quarter
- Backlog: $16.82 billion at quarter end, in line with the same quarter last year
- Market Capitalization: $9.21 billion
Known for projects like the construction of Guantanamo Bay, KBR provides professional services and technologies, specializing in engineering, construction, and government services sectors.
Defense ContractorsDefense 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 GrowthA 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 tends to grow for years. Unfortunately, KBR's 6% annualized revenue growth over the last five years was sluggish. This shows it failed to expand in any major way and is a rough starting point for our analysis.
Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. KBR's history shows it grew in the past but relinquished its gains over the last two years, as its revenue fell by 3.3% annually.
KBR also reports its backlog, or the value of its outstanding orders that have not yet been executed or delivered. KBR's backlog reached $16.82 billion in the latest quarter and averaged 8% 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's revenue grew 5.8% year on year to $1.86 billion, missing Wall Street's estimates. Looking ahead, Wall Street expects sales to grow 12.3% over the next 12 months, an acceleration from this quarter.
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.
KBR was profitable over the last five years but held back by its large expense base. It demonstrated paltry profitability for an industrials business, producing an average operating margin of 4.9%.
On the bright side, KBR's annual operating margin rose by 7 percentage points over the last five years.
In Q2, KBR generated an operating profit margin of 9.8%, up 9.2 percentage points year on year. This increase was a welcome development and shows it was recently more efficient because its expenses grew slower than its revenue.
EPS We track the long-term growth in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company's growth was profitable.
KBR's EPS grew at a remarkable 13.4% compounded annual growth rate over the last five years, higher than its 6% annualized revenue growth. This tells us the company became more profitable as it expanded.
We can take a deeper look into KBR's earnings quality to better understand the drivers of its performance. As we mentioned earlier, KBR's operating margin expanded by 7 percentage points over the last five years. On top of that, its share count shrank by 5%. These are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.
Like with revenue, we also 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 5.5% was lower than its five-year trend. We hope its growth can accelerate in the future.
In Q2, KBR reported EPS at $0.83, up from $0.74 in the same quarter last year. This print beat analysts' estimates by 4.7%. Over the next 12 months, Wall Street expects KBR to grow its earnings. Analysts are projecting its EPS of $3.04 in the last year to climb by 17.2% to $3.56.
Key Takeaways from KBR's Q2 ResultsIt was good to see KBR beat analysts' EPS expectations this quarter. On the other hand, its backlog missed and its revenue fell short of Wall Street's estimates. Overall, this was a mediocre quarter for KBR. The stock remained flat at $68.59 immediately following the results.
