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Why Shares of KBR Are Soaring Today

By Lou Whiteman - Aug 19, 2020 at 2:26PM

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The company's transformation into a government contractor takes a big step forward.

What happened

KBR (KBR 2.33%) shares climbed 10% higher on Tuesday after the one-time Halliburton subsidiary announced an $800 million acquisition designed to push it further into the space and defense markets. KBR has spent the last few years transitioning away from energy and toward defense contracting, and its deal for Centauri is a big step forward in that transformation.

So what

KBR, formerly known as Kellogg Brown & Root, was primarily focused on providing construction and engineering services for the energy sector prior to its spinoff from Halliburton in 2006. But in the years since, it has steadily been increasing its business serving the military and other government customers.

A rocket blasts into space.

Image source: Getty Images.

On Tuesday, the company said it would buy Centauri from Arlington Capital Partners for $800 million, including $300 million in cash and $500 million in new debt. Centauri provides high-end engineering services to space, defense, and national security customers. It employs more than 1,750 workers, a majority of whom hold special government clearances.

The deal gives KBR significant military and intelligence exposure, giving the company opportunities to expand the types of contracts it competes for.

"KBR has undergone a deliberate, strategic transformation to be a provider of innovative, higher-end, digitally enabled solutions and technologies in attractive, stable domains," company CEO Stuart Bradie said in a statement. "The acquisition of Centauri firmly aligns with our strategy of increasing KBR's highly technical, mission-focused, synergistic capabilities and enduring customer relationships."

Now what

It's been tough times for companies focused on energy, and investors more than anything seem to be applauding KBR's attempt to refocus away from the boom/bust commodity business and toward more stable government contracting. Government work should be more predictable for KBR and its shareholders, though the work is highly competitive.

In buying Centauri, KBR is positioning itself to compete for a lot of potentially lucrative future space and intelligence business. Acquisition-focused strategies are inherently risky and can take time to play out, but investors on Tuesday are applauding the direction KBR is moving in.

Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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