It is harder to find value in the market after 2013's almost 30% rise. Investors can either join the momentum trade by jumping on the wagon of high flyers that worked so well in 2013 like Twitter (TWTR) and Netflix (NFLX), sit out trading or dig even deeper to find undervalued names.
One value stock I like here is KBR Inc. (KBR). The stock basically marked time in 2013, but there are myriad reasons this equity will outperform in 2014.
Company Overview:
KBR, Inc. operates as an engineering, construction, and services company worldwide. One of its primary businesses designs and constructs liquefied natural gas and gas-to-liquids facilities for the development and transportation; and delivers onshore and offshore oil and natural gas production facilities, including platforms, floating production and subsea facilities, and pipelines.
Positive Catalysts:
- The trend towards exporting Liquefied Natural Gas (LNG) is in the very early innings as players are just getting export licenses from the administration. This should be a lot term tailwind for KBR as there is a huge discrepancy in natural gas prices in North America and the rest of the world.
- It should also benefit from these huge LNG facility builds worldwide.
- Capital budgets for the energy sector overall looks solid including the mid and down stream markets that provide demand for KBR's services.
- The company could be a tertiary beneficiary if political parties can agree to a long overdue infrastructure spending bill.
- D.A. Davidson just reiterated its "Buy" rating on the stock. The analyst firm has a $40 a share price target on KBR, ~30% above its current share price. Among reasons cited for the positive rating were "KBR's experience and expertise appear to position the company to capitalize on particular waves of spending on North American LNG projects, Canadian oil sands development, and downstream chemical projects".
Valuation:
5 additional reasons to buy KBR at under $32 a share:
- After falling slightly in FY2013, revenues should increase in the 6% to 8% range in FY2014. The stock also sports a five year projected PEG of under 1 (.79).
- The company has a robust balance sheet with almost $900mm in net cash (~20% of total market capitalization) on its books. It also pays a small dividend of 1%.
- Earnings are on a nice upward trajectory. After making a profit of $2.16 a share in FY2012, it is tracking towards over $2.50 a share in earnings in FY2013. Analysts have a consensus calling for $2.82 in EPS in FY2014.
- The stocks sells for just over 11x forward earnings, a discount to the overall market multiple of ~15x forward earnings.
- The 13 analysts that cover the shares have a $39 a share price target on the stock, ~25% above the current stock price.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in KBR over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)
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