KBR's Strength Knows No Boundaries

Of this equity value, $1.1 billion is cash. To be sure, about $400 million of this is advances on contract work. And while goodwill is $679 million, a business like KBR with its global reputation has spent decades cultivating relationships, and its connections are quite valuable. Reputation and quality matter immensely. And the crown jewel of the balance sheet? No debt.

Strip out the excess cash and you have a company with an enterprise value of $1 billion to $1.5 billion that will generate more than $10 billion in revenue in 2008. Profit margins average 3%, or $300 million, in 2008, for a P/E of 5 or 6 depending on your estimate of excess cash.

The key to remember is that most of the work is contractual in nature, so there is always a built-in profit cushion. When you deal with governments, there can be some delays in payments due to billing disputes, but again, that's part of the territory, and that's why KBR is such a dominant player. Economics also teaches us that low profit margins reduce the threat of competition. And any improvement in infrastructure spending by our new administration is a free option on the upside for this company.

A lot of infrastructure and energy cutbacks are already priced in to this stock. At current prices, you're getting a bargain on a business with a significant competitive advantage in terms of the experience of the company. The scope of work is very diverse, the customers have the strongest ability to pay and governments aren't going to neglect matters of defense and strategic economic importance.

Most important, the stock is cheap. Does this mean the price can't decline another 20% in this market? Absolutely not. But with a strong balance sheet and stable long-term contracts, the company is a great investment for the inevitable market upswing.

---

Know what you own: Gad mentions infrastructure. Other companies in the industry include Foster Wheeler (FWLT - commentary - Cramer's Take), Fluor (FLR - commentary - Cramer's Take), Shaw Group (SGR - commentary - Cramer's Take), Jacobs Engineering (JEC - commentary - Cramer's Take) and McDermott (MDR - commentary - Cramer's Take).

---

At the time of publication, Gad was long KBR, although positions may change at any time.

Sham Gad is the managing partner of the Gad Partners Fund and the Gad Partners Offshore fund, value-centric investment partnerships based in Athens, Georgia. Gad has written extensively for the Motley Fool and was a securities analyst for UAS Asset Management, a small, value-focused fund in New York City in 2007. Previously, Gad managed assets for the Gad Investment Group. For additional information, please visit www.gadcapital.com

Gad also runs a value-investing blog inspired by the teachings of Benjamin Graham and Warren Buffett. Additionally, he is currently working on a value investing book to be published by John Wiley & Sons in the fall of 2009. Gad earned his BBA and MBA at the University of Georgia. Send Sham Gad an email. You can reach Gad at [e-mail].