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A Hedge Fund Liquidation Story
Buy PitchHalliburton Spinoff: KBR
November 3rd
James Cullen
Portfolio Manager
Boston College Investment Club
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The BCIC Portfolio
Still Over-Diversified In Sum, Need to Reduce Number of
Holdings
New Buys Must Be Large Part of Portfolio
But Fear is Widespread
Club Has Cash, Bargains Exist
Selectively Add Holdings
Proposal: Buy 600 shares = $8,700 (3.8%)
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KBR Overview
A Spinoff of Halliburton
Diverse Construction, Engineering, and
Services Company Government and Infrastructure
Upstream/Downstream Energy
Services (Construction and Industrial)
Technology (Value-Added Refining)
Venture (Financing and Investing in Projects)
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KBR by the Numbers
$10.6 Billion in Revenue (ttm) P/S of 0.24x; 0.13x Including
Cash
$300 Million in Net Income (ttm) P/E of 8.2x; 4.5x Including
Cash
$310 Million in Owner Earnings (ttm)
Backlog of $15.25 Billion
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Revenues by Segment
78% of G&I Revenues (50% of Total) From US
Government Ops Middle East
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Operating Earnings by Segment
Smaller Reliance on G&I/US Government Middle
East Ops for Earnings (24% of Operating Income)
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Reasons to Buy
Strong, Cash-Rich Balance Sheet Industry Consolidation, BE&K
Purchase
Massive Projects Financed by OilCompanies and Governments
Customer Base Still Has Liquidity
Large Backlog & Legacy Projects
Favorable Risk/Reward
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From the Conference Call, Part I
Withdrawal from Iraq? Short-term Increase in Work
Longer-term, Decrease in Revenues Would Lag
Troop Declines
Energy Price Declines a Problem?
Helps on Input Costs as Well Projects Still Economical
Balance Sheet Financers/National Oil Companies
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From the Conference Call, Part II
Project Cancellations? We have not yet seen any indication that
major projects in the
international energy sectors are being cancelled or delayed
Bill Utt, President and CEO, KBR
LogCAP III and IV
Afghanistan Work Remains Steady
Targeting 40% of IV Contract
KBR Historically Successful in Securing Work
New Projects More Profitable
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Risks to the KBR Long Thesis
Extreme Drop in Global CapEx Upstream Energy or Downstream
Refining
Attempting Project Diversification
Wasting Cash on Balance Sheet
Very Competitive Bidding on Projects
World Peace
and other things we dont know we dont know
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KBR Valuation: The Downside
Stock Around $14.50/Share Back Out $6.65/Share in Cash About
$8
Net Tangible Assets $9.50/Share -35% Downside
Net Cash Position
$6.65/Share -55% Downside
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KBR Valuation: The Upside
Earnings Estimates Full Year 2008: $1.71 4.7x Earnings
Next Year 2009: $1.91 4.2x Earnings
10x Earnings + Cash = $25/Share (+70%)
15x Earnings + Cash = $34/Share (+135%)
Book Value Basis With ROE (Net of Cash) KBR Generates,
About 2.5x Book Value = $36/Share (+150%)
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Conclusion: Buy KBR
Excellent Balance Sheet
Global Scale, Top Player in Field
Desirable Customer Base Resilient on Project Spending
Very Inexpensive Political Risk Seems Oversold
Buy From Distressed Sellers
