Market Share: Federal IT companies predict steady growth will continue

Bill Loomis

With the first quarter earnings season complete, most federal IT service companies reported at or above expectations and gave solid outlooks for the year, although a couple were cautious on the second quarter.

Among publicly traded companies, the average earnings per share growth in the quarter was 20 percent, above the 16 percent that I estimated.

Organic revenue growth was up 16 percent for the group, well above my 10 percent estimate. Contract wins in the quarter for the group were a bit light, although most of the companies indicated they expected higher contract awards in the second and third quarters, based on bids submitted or soon to be submitted.

SRA International Inc. reported the strongest EPS growth, up 40 percent, and the highest organic revenue growth, up 39 percent. Anteon International Corp. reported EPS growth of 33 percent with organic revenue growth of 17 percent.

CACI International Inc. reported 34 percent EPS growth and 15 percent organic revenue growth. ManTech International Corp. reported operating results in line with my estimate, although operating EPS were down 3 percent year-over-year, excluding an asset sale.

ManTech's organic revenue growth was about in line with my estimate at a solid 14 percent year-over-year.

MTC Technologies Inc. reported first quarter EPS growth of 27 percent on strong organic revenue growth of 18 percent.

However, MTC attributed most of the better than expected results to work that was pulled from the second quarter to the first quarter, and left its full year revenue and earnings guidance unchanged.

MTC expects a large jump in growth late in the third and fourth quarters as several large task orders are projected to ramp up, driving organic revenue growth to about 40 percent.

SI International Inc. reported first quarter EPS growth of only 4 percent, even with strong organic revenue growth of 23 percent and total revenue growth of 50 percent.

SI's recent acquisitions have not been accretive enough to earnings to offset dilution of the company's stock offering last year, hurting EPS growth.

Dynamics Research Corp. reported EPS flat year-over-year on zero organic revenue growth, and cut its 2005 EPS guidance from a range of $1.20 to $1.30 to $1.15 to $1.23. DRC cited a tougher hiring environment and contract award delays as reasons driving the lowered EPS guidance.

With first quarter revenue and EPS tracking ahead of investor expectations for most of the federal IT service companies, coupled with the continued uncertainty around the economy and commercial IT spending, investors continue to be attracted to federal IT service stocks, while commercial IT service stocks are underperforming relative to both the federal stock index and the S&P 500.

Year-to-date as of the market closed May 11, the federal IT service companies' stocks are up 1.7 percent, the S&P 500 is down 3.4 percent, and the commercial IT service firms index is down 22 percent.

A pickup in contract awards could attract further investor interest in federal IT service stocks, all else being equal.

Bill Loomis is a managing director of the Technology Research Group at Legg Mason Wood Walker Inc. He can be reached at wrloomis@leggmason.com. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation or needs of individual investors. For additional information and current disclosures for the companies discussed herein, please write to: Legg Mason Wood Walker, Inc., 100 Light St., P.O. Box 1476, Baltimore, MD 21203, Attn: Research Department.

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