Cramer Finds a Value Play

Even after the Dow plummeted 777 points on Monday, Cramer said there were still stocks worth considering. Investors wanted to look for cash-rich companies that weren’t overly sensitive to Wall Street. Those were the names that would be undervalued given the hit that stocks took this week, regardless of Tuesday’s bounce-back.

Cramer thinks he’s found just such a name in KBR . This energy/infrastructure/government-contractor company is down on market fears that a Barack Obama presidency will hurt business, and on hangover from the Dick Cheney-Halliburton connection, but Cramer’s expecting KBR to turn up some time late next apring.

Two things to keep in mind:

As far back as 1968, KBR was working with big-name Democrats like Lyndon Johnson. So there’s reason, Cramer said, to assume that KBR’s business would dry up if Obama wins the Oval Office. If anything, KBR’s present course could be analogous to drug stocks in 1992. They similarly dropped on concern that a Bill Clinton presidency would be bad for biz, but then surged after he won the election.

The other point is that Halliburton spun off KBR back in late 2006, and the stock shot from $20.75 to a high of $43.25. It’s back down to $15.13, but that’s because people still associate KBR with Dick Cheney’s Halliburton days, Cramer said. Once he’s out of office, the stock should rebound.

The best possible catalyst, though, is that next April KBR will finally be able to sell itself. Market rules state a company can’t sell itself for two years after a spin-off or IPO. Given the amount of cash on KBR’s books alone – and that’s not even taking into account a great backlog of business – there’s a good chance this company could quickly find a suitor.

KBR’s market cap is only $2.5 billion. Compare that with the company’s $15 billion backlog. The enterprise value, at $889 million, is even smaller. Enterprise value is what an acquirer would pay for KBR right now. It’s the market cap, plus debt, minus cash. KBR holds $1.6 billion in cash and carries no debt. That’s $9 of cash per share, which means the market’s valuing KBR’s business at only $6 (the stock trades at $15). The price is so cheap Cramer’s betting sooner or later Wall Street catches on, especially as next spring approaches, so investors should get into KBR now.

The only thing to watch for is massive hedge-fund selling. Redemptions still plague these ailing money managers, so they’re looking to raise money as quickly as possible and they’re dumping KBR to do it. Just know this is the case, at least in the short term, before you buy. Redemptions for last quarter are almost done, though, so the pressure should ease soon.

But buying KBR is more than just speculation. While the company gets two-thirds of its business from government and infrastructure projects, Cramer thinks the growth will come from the energy division.

KBR handles everything in this business from infrastructure to pipelines to constructions services. And don’t think that business is slowing just because the price of oil has been dropping. The projects are still out there, and KBR isn’t desperate for work. The company recently signed contracts for $240 million and $232 million in Australia and for ADA-FS, respectively. And KBR licensed out its phenol manufacturing technology for a Chinese chemical plant. As Cramer pointed out, oil prices are significantly higher than they were when KBR came public, so there’s still plenty of demand for KBR’s services.

KBR trades at just 7.5 times earnings – about three times earnings when you subtract the cash. Peers like AECOM are trading at over 14 times earnings. KBR’s price could double and still not push it out of range with the rest of its cohort. That’s cheap.

If another company does buyout KBR, the stock could jump as high as $55, Cramer said. Last year, Washington Group earned a takeover bid worth 0.5 times its enterprise value. (That number is a result of dividing the enterprise value by KBR’s backlog, which is how to value infrastructure companies, Cramer said.) If KBR earned that, there’s your $55 a share. Even if KBR fetches only 0.3 times enterprise value, the stock still climbs to $33, a 118% gain from its present level.

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