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What's in Store for KBR Inc. (KBR) this Earnings Season?

Zacks Equity Research

KBR, Inc. KBR is set to report fourth-quarter 2016 results, before the opening bell on Feb 24.

In the last reported quarter, KBR Inc. posted a negative earnings surprise of 11.8%. The company has a choppy earnings track record, with two beats, one miss and one in-line earnings, for the trailing four quarters. The stock boasts an average positive surprise of approximately 3.9%.

Let’s see how things are shaping up for this announcement.

Factors to Consider

Over the past few quarters, KBR’s Government business turned out to be its strongest profit churner. During third-quarter 2016, Government Services’ revenues more than doubled on a year-over-year basis, benefiting from solid expansion of the existing U.S. government contracts and task orders in support of the U.S. Military. This apart, the company’s diligent business streamlining actions are also expected to supplement the financials for the upcoming quarter.

The company clinched some major contracts in its Government Services Business, which are likely to boost the fourth-quarter top-line performance. Some noteworthy contracts include Kuwait Base Operations and Security Support Services for the U.S. Army, award of one of five seats on the U.S. Naval Facilities Engineering Command and Pacific's Global Contingency Services Multiple Award Contract (GCSMAC) II, and the UK government's Army 2020 project. We also believe selective opportunities in hydrocarbon business are likely to supplement the fourth-quarter sales.

Especially, selective opportunities in downstream petrochemical and ethylene projects, and growing number of small-scale LNG projects in North America are anticipated to support the fourth-quarter results. KBR’s billion-dollar backlog, 70% of which is in low risk work in the Government Services, also adds to its strength. This apart, the company’s strategic acquisitions, including the buyout of Wyle Inc. and Honeywell Technology Solutions, which have fortified its government business, will likely bolster revenues for the fourth quarter.

Despite these positives, overall macroeconomic sluggishness remains a major concern for the company. Prolonged softness in the energy related markets is estimated to hurt the company’s financials for the soon-to-be-reported quarter. Volatile oil and gas markets, with oversupply putting pressure on the prices and spending levels, have marred KBR’s projects and orders.

Further, KBR had cut its earnings guidance in the last reported quarter which also indicates a challenging fourth quarter. Cost increases on the EPC power project in the Non-Strategic Business segment, as well as the ammonia project in the E&C segment, have led the company to slash its full-year 2016 guidance. This apart, strengthening of the U.S. dollar also poses as a major headwind for the quarter to be reported.

Earnings Whispers

Our proven model does not conclusively show that KBR will beat earnings estimates in this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. But that is not the case here as you will see below.

Zacks ESP: Earnings ESP for the company is currently pegged at 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate are pegged at 17 cents. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

KBR, Inc. Price and EPS Surprise

KBR, Inc. Price and EPS Surprise | KBR, Inc. Quote

Zacks Rank: KBR’s Zacks Rank #3, when combined with 0.00% ESP, makes surprise prediction difficult.

Note that we caution against Sell-rated stocks (Zacks Rank #4 or 5) going into an earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks That Warrant a Look

Here are some companies that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this quarter:

Century Aluminum Company CENX has an Earnings ESP of +62.5% and a Zacks Rank #2.

Milacron Holdings Corp. MCRN has an Earnings ESP of +11.43% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Codexis, Inc. CDXS has an Earnings ESP of +36.4% and a Zacks Rank #3.

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