Should You Buy It?: KBR Poised for a Rebound

Shares of KBR (KBR - commentary - Cramer's Take) have fallen some 20% year-to-date to around $30, but are still well above the $17 a share where the stock debuted in November 2006, when the company was carved out of Halliburton (HAL - commentary - Cramer's Take).

KBR designs and builds energy and chemical plants, as well as other infrastructure projects. In fact, the company makes about 90% of its sales overseas, helping to insulate it from a continued U.S. slowdown in business spending.

The construction and engineering firm generates about half of its revenue from government contracts involving support in Iraq. The company has come under considerable media scrutiny from these dealings after audits have accused KBR of overcharging the government for food, housing and other services.

With that in mind, I'm here to answer readers' questions: Should you buy it? Does KBR offer value at current levels, or should investors focus elsewhere?

At current levels, the stock is valued 17 times expected 2008 earnings of $1.77 a share. That represents an 8% discount to the industry average, which is impressive given that KBR is expected to deliver 64% year-over-year earnings growth in 2008.

It's also worth noting that the company has a pristine balance sheet with $1.93 billion of cash ($11.40 a share) and no debt, as of the end the first quarter. KBR has since committed some of that cash, in May, to buy privately-held E&C firm BE&K for $550 million.

BE&K had revenue of $2 billion in the most recent year, with business in the U.S., Poland and Russia. The deal is expected to be neutral to earnings in 2008 and accretive in 2009.

The rest of KBR's cash will be overseen by recently appointed CFO Kevin Denicola. He was most recently the CFO of German-based Lyondell Chemical.

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David Peltier is a research associate at TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Peltier appreciates your feedback; click here to send him an email.

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