KBR Still A Buy In D.A. Davidson's View Following Severe Guidance Cut

Despite severe earnings guidance cut, D.A. Davidson still rates KBR, Inc. (NYSE: KBR) a Buy as it sees lower long-term earnings risk for the company, which is exiting the high risk fixed-price EPC market for power projects to focus on low-risk government contracts.

KBR slashed its FY16 full-year earnings guidance range to $0.19-$0.39 per share as it would record charges of $130 million ($0.91 per share) related to higher costs on an under construction power-generating facility and an ammonia project.

Related Link: KBR 10% Selloff Presents Buying Opportunity

The problem project is currently 86 percent completed and expected to be finished in early 2017. It will be KBR's final project in the fixed-price EPC power segment. Management indicated the company will seek recoveries on both projects, but timing and prospects seem uncertain.

Meanwhile, KBR is transforming to a lower-risk government/technical services firm and already acquired two government service companies Wyle and HTSI.

The brokerage maintained its FY2017 projections for EPS and revenue at $1.35/$4.94 billion, respectively, despite project charges could pressure margins further.

"With most of the current charges apparently related to a market segment from which the company is in the process of withdrawing, we see reduced long-term earnings risk from additional project charges, particularly given the increased investment in lower risk government contracting and potential benefits from recently improved oil and gas prices," analyst John Rogers wrote in a note.

At time of writing, shares of KBR rose 5.87 percent to $14.43, while Rogers has a price target of $20.