KBR 10% Selloff Presents Buying Opportunity

Deutsche Bank believes the recent selloff in KBR, Inc. KBR is overdone and upgraded the stock to Buy from Hold, saying "the stock could reach $20-25 (45-80% upside) over the longer term (>12M)."

Driven by the 2016 EPS guidance cut, shares of KBR fell 10 percent on Monday to close the day's trading at $13.63. They have dropped 21 percent in the last year.

Analyst Chad Dillard noted that Monday's 10 percent selloff is "overdone, backward-looking and suggests the market under-appreciates KBR's transformation to a lower-risk gov't/technical services firm." Dillard also raised his price target to $16 from $14.

Related Link: KBR Shares React To Friday's Precipitous Cut In Guidance

"KBR now trades at a ~15% discount, near where it traded prior to the mgmt/strategy change, implying the market gives no credit to KBR's new strategic approach," Dillard wrote in a note.

This indicates that the market still considers KBR as a high risk oil & gas EPC contractor, generating most of its earnings from LNG. However, post the acquisition of government service companies Wyle and HTSI, it is becoming a lower risk gov't/technical services company.

"We estimate KBR can generate $1.50-$1.80 in normalized earnings by 2020 driven by cost savings, share gains in Government services and an improving product mix," Dillard highlighted.

In addition, Dillard says most of the near-term risk is already factored into the share price.

Further, the analyst noted that there is potential for multiple to rerate upwards as despite KBR's transformation towards a gov't/technical services company, which typically trades at 15x earnings, it currently trades like an E&C stock (11x earnings).