KBR's (NYSE: KBR) announcement earlier this week that it has been awarded a $2.8 billion engineering, procurement, and construction contract for the Sonatrach Skikda LNG project in Algeria prompted me to take a fresh look at this process engineering giant.
You'll recall that KBR, until recently, was the engineering and construction unit of Houston- and Dubai-based oilfield services company Halliburton (NYSE: HAL). Prior to its spinoff as a separate company, KBR had brought to Halliburton all manner of criticism as a result of the unit's extensive work for the U.S. government and military in Iraq and Afghanistan.
KBR is a solid company, possessing capabilities virtually unmatched in the worlds of engineering and construction. For that reason, it's been granted some controversial contracts in the war zones. At the same time, its unparalleled expertise in LNG engineering -- it's designed or constructed more than half the world's operating LNG capacity -- obviously led to its new pact in Algeria, where work on the Sonatrach project will begin immediately.
But my fresh look at KBR also provides clear evidence of why, in advance of its spinoff, the unit wasn't particularly popular with those assessing Halliburton as an investment. As is often the case in finance, the numbers tell an interesting story here. For instance, starting with forward P/E ratios, based on expected 2007 earnings, KBR trades at nearly double Halliburton's 14.7 times. The latter company, however, trades at a distinct discount to the 17.5 times multiple accorded Baker Hughes (NYSE: BHI) and the 21.9 multiple sported by oilfield services leader Schlumberger (NYSE: SLB).
However, the P/E discrepancy clearly doesn't reflect any sort of wild growth anticipated for KBR. Its five-year PEG ratio is above 3, while Halliburton's is below 1, and Baker Hughes and Schlumberger are both very slightly above 1.
I could toss out other metrics, but I think you're getting the picture. I've long had difficulty justifying investments in engineering-based companies, with their generally slim margins, and KBR is no exception. For my money, I'd suggest that Fools ignore this newly emancipated company and instead look carefully at its former parent.
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Fool contributor David Lee Smith does own shares in Halliburton and Baker Hughes, but not in the other companies mentioned. He welcomes your questions or comments. The Motley Fool has a very solidly constructed disclosure policy.
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