We came across a bullish thesis on KBR, Inc. (KBR) on Directionally Correct Research’s Substack by Will Powers. In this article, we will summarize the bulls’ thesis on KBR. KBR, Inc. (KBR)’s share was trading at $55.81 as of Jan 30th. KBR’s trailing and forward P/E were 23.65 and 13.93 respectively according to Yahoo Finance.
KBR presents an intriguing special situation with a strong fundamental backdrop, driven by its position as a contractor providing engineering and technology services across government and corporate sectors. Operating through its Mission Technology Solutions (MTS) and Sustainable Technology Solutions (STS) segments, KBR derives nearly 60% of its revenue from the U.S. government, making it susceptible to industry-wide sell-offs driven by election uncertainty and federal budget concerns. Despite this, the company’s 2027 financial targets imply a 15% three-year IRR at its current valuation, making it an attractive investment even before considering a potential business split.
A breakup scenario, however, presents a much more compelling opportunity. While both MTS and STS have similar growth rates, STS enjoys higher margins and lacks the concentration risk associated with government contracts. Despite its superior financial characteristics, KBR has historically traded at a discount to peers, partly due to the difficulty in valuing STS within the broader company. A separation would allow MTS to trade in line with other government contractors at 11x EBITDA, while STS, benefiting from secular tailwinds in energy transition and decarbonization, could command a 14x multiple. This suggests that KBR is trading at a meaningful discount to its sum-of-the-parts valuation, but unlocking this value requires a hard catalyst.
That catalyst may have arrived in the form of activist involvement. In December 2024, Irenic Capital disclosed a stake in KBR and began pushing for a sale or spinoff of STS. The firm has a track record of successfully advocating for corporate breakups, most recently influencing the sale of Barnes Group to Apollo. Further bolstering the case, KBR’s January 2025 re-segmentation made STS more self-sufficient by transferring the Critical Infrastructure division, increasing the segment’s revenue by 15%. This move suggests management is at least open to a split, even if publicly cautious about its feasibility. Moreover, KBR has deliberately created duplicate support systems for each segment, making a future separation operationally smoother.
If KBR remains intact and meets its 2027 targets, it could generate $5 in free cash flow per share, supporting a mid-teens IRR at 10x EBITDA and a 20% IRR if rerated to 11x. A separation, however, could lead to a substantial revaluation. If STS is spun off in late 2025 or early 2026, shareholders would retain equity in a more focused MTS business that could trade in line with its peers, while STS would emerge as an independent entity benefiting from strong growth drivers. This scenario provides a compelling investment case, with multiple paths to unlocking significant upside.
KBR, Inc. (KBR) is not on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 53 hedge fund portfolios held KBR at the end of the third quarter which was 56 in the previous quarter. While we acknowledge the risk and potential of KBR as an investment, our conviction lies in the belief that some 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 was originally published at Insider Monkey.