We recently published a list of 10 undervalued aerospace stocks to buy, according to analysts. In this article, we take a look at how KBR, Inc (NYSE:KBR) compares to other undervalued aerospace stocks.
The international aerospace and defense industry
The aerospace and defense industry is a fast-growing industry, primarily due to increased global travel following the pandemic and increased geopolitical tensions that have led to higher government defense spending. 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. The growth in this sector is due to increasing military modernization and increased defense spending. Increased spending on air travel is contributing to the growth of the commercial aerospace industry.
Geopolitics and increased defense spending
The world is in a period of turmoil where geopolitical tensions are leading to wars. While war and geopolitical tensions are a deal breaker for many industries, things are different for aerospace and defense companies. One of the key revenue drivers for these companies is government contracts for military aircraft, weapons and defense systems. As the risk of war increases, defense spending increases and aerospace and defense companies receive more contracts.
According to a report by CNBC on April 22, global military spending reached a historic high in 2023 after a 7% increase. Last year, global military spending reached a record high of $2.4 trillion. One of the main reasons for the increased defense spending was the ongoing conflict between Russia and Ukraine and the recent tensions between Israel and Palestine. Last year, the United States, China and Russia were considered the countries with the highest military spending.
According to the U.S. Department of Defense, the government has a budget of $2.09 trillion and plans to spend $972.88 billion in 2024, of which $229.80 billion is earmarked for contract commitments, indicating increased business opportunities for aerospace and defense companies during the year.
Upcoming trends in the aerospace industry
According to a survey by McKinsey & Company, AI-powered advances have the potential to fundamentally change how aircraft are maintained, repaired and overhauled, but this will require companies to embrace digital transformation.
Aircraft fleet management is a demanding sector. In the US alone, airlines have seen a 15% increase in maintenance costs over the last five years. In addition, there has been a 14% increase in flight delays due to maintenance.
Maintenance, repair, and overhaul (MRO) can be optimized using AI-powered solutions that enable better performance and efficiency. For example, AI-powered MRO can predict the right maintenance needs of an aircraft and the labor, material, and time required for maintenance. However, to harness the power of AI, maintenance organizations would need to become comfortable with adapting to new technologies and dealing with disruption of the status quo. The McKinsey & Company survey found that only 33% of respondents believed that adopting digital solutions was critical to achieving business goals. On the other hand, 70% believed that it could become critical in the next 3-5 years, indicating a reluctance to immediately adopt 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 the iShares US Aerospace & Defense ETF. We compiled a list of stocks operating in the aerospace and defense industry and filtered out 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 ratio of 22 (according to data from the WSJ).
Once we had our filtered list, we ranked these stocks by the average upside price target according to Wall Street analysts. The stocks are ranked in ascending order of the average upside price target as of August 15, 2024.
At Insider Monkey, we’re obsessed with the stocks hedge funds invest in. The reason is simple: Our research shows we can outperform the market by mimicking the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks each quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (Further details can be found here).
An engineer in protective clothing overlooks a research and development laboratory.
KBR, Inc. (NYSE:KBR)
Average upside price target as of August 15: 19.54%
Estimated P/E ratio as of August 15: 20
KBR, Inc. (NYSE:KBR) provides innovative science and technology solutions to governments and businesses worldwide. The company operates in two primary business segments: Government Solutions and Sustainable Technology Solutions. In the Government Solutions segment, the company provides lifecycle 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 value to the aerospace and defense industries, it’s important to look at some of its products. For example, 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 objects in the air.
The company reported a successful second quarter of 2024. Revenue increased 6% year-over-year to $1.9 billion. Revenue growth was supported by improvements in both segments. However, the Sustainable Technologies Solutions segment grew 14% year-over-year, while the Government Solutions segment grew only 3%. The Sustainable Technology segment also delivered strong adjusted EBITDA growth of 23%, primarily due to favorable revenue mix and milestone licenses throughout the quarter.
One of the notable wins in the Government Solutions segment was an $8 million IAC MAC contract from the U.S. Air Force’s Life Cycle Management Center. In addition, KBR, Inc. (NYSE:KBR) maintained a solid backlog of $16.2 billion at the end of the quarter.
KBR, Inc. (NYSE:KBR) is undervalued. It is trading at 20 times its forward earnings while the market average is 22. Moreover, its earnings are expected to increase by 17% to $0.81 over the course of the year. 12 analysts strongly recommend the stock as a Buy, with their median price target of $77.5 representing an upside potential of 19.54% from current levels.
Cove Street Capital Small Cap Value Fund stated the following about KBR, Inc. (NYSE:KBR) in its Q2 2024 Investor letter:
“The positive thing is KBR, Inc. “KBR Corp. (NYSE:KBR) has delivered strong performance year to date, following an investor day in the second quarter that highlighted the success of the last four-year plan (2020-2023) before setting ambitious but credible targets for the next four years (2024-2027). Since 2020, KBR has transitioned its commercial business from high-risk EPC projects to a more differentiated IP-first consulting approach that now generates 20% EBIT margins and contributes 40% to its overall profitability. KBR has cleaned up its balance sheet by unwinding convertible notes and warrants and now has healthy net debt of 2x. With the upcoming expansion of a $20 billion government services contract with the U.S. Army, the company is well positioned to generate cash and deliver value to shareholders.”
Total KBR 5th place on our list of the best undervalued aerospace stocks to buy. While we recognize KBR’s potential as an investment, we believe AI stocks promise higher returns and do so in a shorter time frame. If you’re looking for an AI stock that’s more promising than KBR but trades at less than 5 times its earnings, read our report on the cheapest AI stock.
READ MORE: $30 trillion opportunity: The 15 best humanoid robot stocks to buy, according to Morgan Stanley And According to Jim Cramer, NVIDIA has “become a wasteland”.
Disclosure: None. This article was originally published on Insider Monkey.
