Update: KeyBanc Upgrading KBR To Buy (KBR)

KeyBanc Capital Markets is upgrading shares of KBR, Inc.

to Buy, and is raising its estimates for 2011 and 2012 following earnings. It has a $43 price target on shares. In a note to clients, KeyBanc writes, "We are upgrading our rating on KBR, Inc. (KBR-NYSE) to BUY (from HOLD) on an incrementally constructive view on LNG demand and additional planned LNG projects moving forward to the EPC phase following the Japanese nuclear crisis. We are positive on KBR's positioning with respect to specific LNG projects and KBR's recent wins on projects within other key areas of the oil & gas sector, which highlight its more diverse energy capabilities. We also continue to view KBR's valuation as attractive vs. its most immediate energy focused E&C peers. While we note that the winding down of U.S. defense spending in Iraq remains a headwind for KBR in 2011-2012, we perceive this trend is widely known and factored into investor and sell-side expectations at this point. We believe the impact on earnings and backlog will be more than offset by positive mix shift to KBR's higher margin businesses with stronger growth outlooks (e.g., Hydrocarbons, Infrastructure & Minerals and Services) driven by the ongoing global macro recovery and continued growth in energy and mining infrastructure spending in developing nations, in particular. Further, we highlight KBR's strong balance sheet and roughly $4 in net cash per share as providing ample dry powder to make strategic acquisitions and/or continue enhancing shareholder returns via its buyback program. We are setting our price target for KBR at $43, which is predicated on a P/E multiple of 19x on our revised 2011 EPS estimate of $2.27 (from $2.19), which compares to its historical average of 15x and range of 7-30x. Currently, KBR trades at 16.2x our 2011 estimate, the lowest among our large diversified E&C firms with high exposure to energy end markets, which currently trade at an average multiple of roughly 19x." Shares of KBR closed at $36.73 yesterday.