We recently compiled a list of the 10 Undervalued Aerospace Stocks To Buy According to Analysts. In this article, we are going to take a look at where KBR, Inc (NYSE:KBR) stands against the other undervalued aerospace stocks.
The International Aerospace and Defense industry
The aerospace and defense industry is a fast-growing industry, mainly because of the increased global travel after the pandemic and increased geopolitical tensions, which has led to increased government spending on defense. According to Research and Markets, the global aerospace and defense industry was valued at $884 billion in 2023. The industry is expected to grow at a compound annual growth rate of 5.8% to reach $1.23 trillion by 2028. Growth in the sector pertains to the rise in military modernization and increased defense spending. Whereas, increased spending on air travel is contributing to the growth in the commercial aerospace industry.
Geopolitics and Increased Spending on Defense
The world has been in a straight of turmoil, with geopolitical tensions leading to wars. While war and geo-political tensions are a dealbreaker for many industries, for the aerospace and defense companies the story is different. One of the key drivers of revenue for such companies is government contracts for military-grade aircraft, weapons, and defense systems. Thereby, with increased risks of war, defense spending goes up and aerospace and defense companies land more contracts.
According to a report by CNBC on April 22, global military spending hit an all-time high in 2023 after a 7% ramp-up. The global military spending was at a record high of $2.4 trillion last year. One of the key drivers of increased defense spending has been the prolonged Russia-Ukraine conflict and the recent tensions between Israel and Palestine. During the previous year the United States, China, and Russia were noted to be the biggest military spenders.
According to the U.S. Department of Defense, the government has $2.09 trillion in budgetary resources and plans to spend $972.88 Billion during 2024, out of which $229.80 billion is designated for award obligations. This indicates increased business opportunities for aerospace and defense companies during the year.
Upcoming Trends in the Aerospace Industry
According to a survey conducted by McKinsey & Company, AI-powered advancements can reshape aircraft maintenance, repair, and overhaul, however, companies need to accept the digital transformation.
Aircraft fleet management is a challenging sector. In the US alone, airline companies have witnessed a 15% increase in maintenance costs during the past 5 years. Moreover, there has been a 14% increase in flight delays due to maintenance.
The maintenance, repair, and overhaul (MRO) can be optimized using AI-powered solutions that allow better performance and improve efficiency. For Instance, AI-powered MRO can predict proper maintenance needs for an aircraft and the labor, material, and time needed for the maintenance. However, to leverage the power of AI, maintenance companies would have to become comfortable with adapting to new technologies and deal with the status quo disruption. The survey by McKinsey & Company found that only 33% of their respondents believed digital adoption to be critically important in achieving organizational objectives. Whereas 70% believed it could become critically important in the next 3 to 5 years, indicating hesitation towards immediate adoption of AI-powered solutions in the MRO sector.
Our Methodology
To compile the list of 10 undervalued aerospace stocks to buy according to analysts we used the Finviz stock screener and iShares U.S. Aerospace & Defense ETF. We aggregated a list of stocks that operated in the aerospace and defense industry and filtered stocks that had a forward P/E ratio of less than 22 and a positive earnings growth rate. These stocks are cheaper than the market, which currently has a forward P/E of 22 (according to data from WSJ).
Once we had our filtered list, we ranked these stocks based on the average price target upside as per Wall Street analysts. The stocks are ranked in ascending order of the average price target upside as of August 15, 2024.
At Insider Monkey we are obsessed with the stocks that hedge funds pile into. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
An engineer wearing protective gear overlooking a research and development laboratory.
KBR, Inc (NYSE:KBR)
Average Price Target Upside as of August 15: 19.54%
Forward P/E as of August 15: 20
KBR, Inc. (NYSE:KBR) provides innovative science and technology solutions to governments and businesses worldwide. It operates through two main business segments including Government Solutions and Sustainable Technology Solutions. Under the Government Solutions segment, the company provides life cycle support for defense, intelligence, space, aviation, and other government programs. Its services include research, prototyping, systems engineering, and other related services. KBR, Inc. (NYSE:KBR) also operates a portfolio of proprietary process technologies for ammonia/syngas, chemicals, clean refining, and circular economy solutions.
To understand how KBR, Inc. (NYSE:KBR) provides utility in the aerospace and defense industry, it is important to look at some of its products. For instance, the company developed Iron Stallion, a system that helps track the movement of objects in space. The system helps national security agencies track and predict the movements of airborne objects.
The company posted a successful second quarter of 2024. Its revenue grew 6% year-over-year to reach $1.9 billion. Revenue growth was supported by improvements in both segments, however, the Sustainable Technologies Solutions segment grew 14% year-over-year as compared to the Government Solutions segment which grew only 3%. The Sustainable Technology segment also delivered strong adjusted EBITDA growth of 23%, mainly attributed to a favorable revenue mix and milestone licensing throughout the quarter.
One of the notable wins within the Government Solutions segment was an $8 million IAC MAC contract by the United States Air Force Life Cycle Management Center. In addition to this KBR, Inc. (NYSE:KBR) was also able to maintain a robust backlog of $16.2 billion at the quarter end.
KBR, Inc. (NYSE:KBR) is undervalued. It is trading at 20 times its forward earnings while the market average sits at 22. Moreover, its earnings are also expected to grow by 17% during the year to reach $0.81. 12 analysts have a strong buy rating on the stock, with their median price target of $77.5 presenting an upside of 19.54% from current levels.
Cove Street Capital Small Cap Value Fund stated the following regarding KBR, Inc. (NYSE:KBR) in its Q2 2024 investor letter:
“On the plus side, KBR, Inc. (NYSE:KBR) has been a strong performer so far YTD on the back of an investor day in the second quarter that highlighted the success of the last four-year plan (2020-2023) before laying out ambitious but credible targets for the next 4 years (2024- 2027). Since 2020, KBR has pivoted their commercial business away from high-risk EPC projects to a more differentiated IP-first consulting approach that now sees 20% EBIT margins and contributes 40% of their overall profitability. KBR has cleaned up their balance sheet by settling convertible notes and warrants and now sits at a healthy 2x net leverage. With the upcoming ramp of a $20B government services contract with the U.S. army, the company is well positioned to generate cash and return value to shareholders.”
Overall KBR ranks 5th on our list of the best undervalued aerospace stocks to buy. While we acknowledge the potential of KBR as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than KBR but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.